German businesses defied sovereign debt worries as the Ifo index rebounded in June. The headline index increased to 101.8, from 101.5; its highest level since May 2008. The current assessment continued its recent upward trend and increased to 101.1, from 99.4. At the same time, the expectations component dropped for the second consecutive month, decreasing to 102.4, from 103.7.
Right now, the only worry of the German economy should be sluggish domestic demand. The export engine is humming and should make the second quarter a real smash. For the time being, the inventory cycle, strong global demand and the weak euro will continue to support the export-led recovery. Some unexpected support for the German economy could now come from the Far East. The Chinese announcement to allow for a more flexible currency - if implemented - would benefit German exports. China has significantly gained importance as an export destination. Over the last year, German exports to China have increased by almost 70%.
Today’s Ifo reading shows that grass-rooted German businesses seem to be looking through the sovereign debt worries and recent market turmoil. They keep it simple and look at the upshots of the current crisis: the weaker euro. Of course, the current growth dynamics will slow down eventually. However, for the time being, the German export engine is running smoothly, making Germany the economic powerhouse of the Eurozone.
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