It looks as if German companies have finally woken up to the reality of the euro crisis. The Ifo index continued its recent downward trend in July, dropping to 103.3, from 105.3 in June. This is the third consecutive drop, bringing the Ifo index to its lowest level since April 2010. Both the current assessment and the expectation component dropped further. Particularly the expectation component’s fall to the lowest level in three years does not bode well for the outlooks of the Eurozone’s biggest economy.
Latest indicators should have been an urgent wake-up call for the German economy. There are clear signs that the manufacturing sector has rashly left the island of happiness. With austerity-driven slowdowns coming now also to most other core Eurozone countries, an obvious cooling of the Chinese economy and a still not very dynamic US recovery, order books are emptying and companies have started to reduce stocks.
Nevertheless, the German economy could still be able to escape the real crisis feeling in the second quarter. Up to now, available hard data paint a less bleak picture of the German economy than soft indicators. Compared with the first quarter, industrial production in April and May has been stable, consumption has slightly improved, net exports increased significantly and new orders recently rebounded. Obviously, the jury is still out and the month of June was crisis-loaded enough to have sent the economy into recessionary territory.
At second glance, the picture of relative crisis-resistance has to be a bit more differentiated. In fact, the euro crisis has already reached the external part of the German economy but not the domestic one. Capacity utilisation in the manufacturing industry has been dropping since last summer, indicating that the industrial engine is not running at full speed any longer. Judging from latest developments, the main growth drivers for this year are construction and, with the strong labour market and wage increases, private consumption.
Looking ahead, however, a permanent decoupling of the domestic economy from the external sector seems highly unlikely; particularly in a traditional export-oriented economy like the German one. The euro crisis immunity is clearly fading away. Today’s Ifo gives an unappetising foretaste of worse things to happen.