Unstoppable?

While many market participants are currently debating the chances of a double dip and a global slowdown, German businesses are still gaining confidence. In August, the headline Ifo index increased to 106.7, from 106.2 in July; its highest level since June 2007. The current assessment continued its recent upward trend and increased to 108.2, from 106.8. At the same time, the expectations component dropped slightly to 105.2, from 105.5, but remains far above its historical average.

After impressive second quarter growth, it does not need a rocket scientist to come up with a 2010 growth forecast of around 3% for the German economy. At present, such a forecast seems to be rather cautious. Even if the economy was to stagnate in the second half of the year, GDP growth would already amount to 2.8% over the entire year. And stagnation does not seem likely. On the contrary, order books are still filling and there is anecdotal evidence of increasing backlogs and labour bottlenecks. Call this a luxury problem. Any future slowdown in global trade would take a while before it actually hit German industrial production. For the time being and for rest of the year, just processing the received orders could be enough to bring annual GDP growth to levels hardly seen since reunification.

Today’s Ifo index reflects untarnished confidence and bodes very well for near-term growth prospects. It might not be a new German “Wirtschaftswunder”, yet, and second quarter growth will remain exceptional. However, even with an inevitable shift into a lower gear in the second half of the year, the Eurozone’s growth engine will continue to run smoothly.