Monday, March 26, 2012

German Ifo - Is sky the limit?

Still optimistic. Today’s Ifo index shows that German businesses have not lost their overwhelming optimism. In March, the Ifo index increased to 109.8, from 109.7 in February. While the current assessment component was unchanged at 117.4, expectations continued their upward trend and increased to 102.7, from 102.4.

After the first growth contraction since the end of the recession, soft indicators of the first two months of the year had alleviated fears of a technical recession in Germany. Both the Ifo index and the European Commission’s economic sentiment index for Germany had reached a seven-month high in February, while the ZEW index this month even spurred to the highest level in almost two years. Hard data had also confirmed the economic rebound, even if the rebound was not yet sufficient to fully offset the December falls. Today’s Ifo index gives hope that this catching up should take place in the coming months.

Despite the steadfast optimism, the German economy is facing a couple of new challenges. High oil prices, austerity measures in almost all other Eurozone countries and the slowdown of the Chinese economy are eroding both domestic and external demand. The latest developments, both at the global and the Eurozone level, show that the German economy might sometimes be an island of happiness but will clearly not remain an economic island

Today’s Ifo index illustrates once again the sound economic fundamentals. The strong labour market, filled order books and low inventories still bode well for growth in the coming months, albeit at a low level. Even at a slower pace, the German economy should remain the Eurozone growth show case of this year. It might not be Champions League quality anymore, but with today’s Ifo index it should probably be enough to win the Europa League.

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