Friday, April 20, 2012

Ifo on the rise - Discrepancy between hard and soft data widens

Unrealistically optimistic? Today’s Ifo index shows that German businesses have not lost their overwhelming optimism. In April, the Ifo index increased to 109.9, from 109.8 in March, the sixth consecutive increase. While the current assessment component increased to its highest level since September last year, expectations remained unchanged.

Since the beginning of the year, the discrepancy between soft and hard data has increased significantly. While confidence indicators continued to increase, pointing to a very optimistic picture of the economy, the real economy has troubles picking up pace again. It looks as if the February freeze has extended the growth stopover by another quarter. Instead of experiencing a quick rebound, the economy is still flirting with a technical recession. Any catching up of the construction sector in March and the overall rebound in industrial production would have to be impressively strong, to return the economy into recession-free territory already in the first quarter.

Looking beyond the first quarter, our outlook for the German economy is more nuanced than during last the last years and the exuberance of 2010 and 2011 could soon make room for more realism and lower expectations. With austerity-driven slowdowns coming to most other core Eurozone countries, an obvious cooling of the Chinese economy and a still not very dynamic US recovery, export growth should clearly come down. However, hopes for more domestic consumption on the back of higher wage could easily be disappointed. As German exporters have already been squeezing their margins to secure market shares, substantial wage increases as recently agreed for the public sector are unlikely to materialise in the tradable sector.

In our view, today’s Ifo index paints a too positive picture of the growth prospects for the German economy. Of course, with a lack of domestic imbalances and no pressing cleanup efforts, the German economy remains the six-cylinder growth engine of the Eurozone. However, it is not running at full throttle anymore.

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