Monday, August 27, 2012

Ifo continues downward slide

The downward slide continues as German companies are increasingly becoming pessimistic about the future. The Ifo index continued its recent downward trend in August, dropping to 102.3, from 103.3 in July. This is the fourth consecutive drop, bringing the Ifo index to its lowest level since March 2010. With a sharp drop to 94.2, from 95.6 in July, the expectation component has now reached levels which in the past corresponded with recessions. The only upside in today’s Ifo report is that the drop in the current assessment component remained rather modest (to 111.2, from 111.6).

Exports and domestic consumption have shielded the German economy against the euro crisis virus up to now. This immunity, however, has been crumbling away quickly over recent months. The sharp drop in new orders from other Eurozone countries since the beginning of the year and continued inventory reductions have weakened the German industry. Moreover, as several companies have again started to introduce short-time work schemes support from the labour market should also diminish in the coming months. As a consequence, it looks as if the German economy will, at best, be treading water in the coming months. The latest batch of sentiment indicators even points to a contraction in the third quarter. However, let’s be clear, given the sound fundamentals of the economy, any contraction should hardly feel recessionary in Germany.

The still solid current assessment component of today’s Ifo report illustrates the relative strength of the economy. However, the headline figure and, above all, downbeat expectations clearly add to concerns that strong growth in the first half of the year was just the last flaring up of the new German Wirtschaftswunder.

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