And now for something completely different…While currently all eyes are on Sunday’s Eurozone summit, or better: an entire series of summits, there actually still is an economy to watch. Today’s Ifo index shows that at least the German economy is slowing, without falling off the cliff. In October, the Ifo index dropped to 106.4, from 107.5 in September. This is the lowest reading since June 2010, but still far above its historical average. The drop was almost equally driven by weaker current assessment and some further downward correction of expectations. The positive take is that the drop in expectations of latest months has slowed down.
Recent developments in financial markets and confidence indicators have brought back the bad memories of 2008 when the German economy fell into a deep black hole. Could Greece 2011 be the same as Lehman 2008? In our view, despite all similarities with 2008, there are currently important differences: orders at hand are much higher than in 2008 and inventories are much lower. While the Lehman crash hit German industry at a moment of overproduction, companies currently still have their hands full reducing the high order backlog. This time around, German companies look much better prepared to face a Lehman-type crisis. In addition, low interest rates, positive investment plans and the strong labour market should also cushion an eventual slowdown in the coming months.
For a long while, the Eurozone’s economic Superman looked invulnerable. However, with Italy and France starting to falter, Germany is now finally feeling the pain of the sovereign debt crisis. Fortunately, this is not 2008 and the economy should not collapse. Economic fundamentals are simply too sound. However, the Eurozone’s economic Superman may have finally met its kryptonite.