The downward slide continues. After an encouraging PMI reading last week, today’s Ifo could not follow up. The leading German confidence indicator continued its recent downward trend in September, dropping to 101.4, from 102.3 in August. This is the fifth consecutive drop, bringing the Ifo index to its lowest level since February 2010. With a drop to 93.2, from 94.2 in August, the expectation component is clearly in recessionary territory. The only upside in today’s Ifo report is that the current assessment component is still relatively high at 110.3.
Today’s Ifo index shows that German companies remain sceptical about the economic impact of Mario Draghi’s magic. Despite fears of a looming Eurozone break-up clearly fading away, German businesses are downscaling their expectations. It looks as if German businesses realise that keeping the Eurozone alive alone will not return growth quickly. The structural adjustments in Germany’s Eurozone trading partners will take time and will dampen demand for German products.
Looking further ahead, German growth should be affected negatively by at least three major factors: i) the slowdown of the global economy and the ongoing euro crisis, weighing on exports; ii) the worsening of the labour market, hampering domestic demand; and iii) the “perverse euro rescue factor”. Particularly the latter is an interesting twist. Throughout the euro crisis, the German economy has been benefitting from some positive side-effects, ie a weaker euro and very low interest rates. In the second quarter, these positive effects were already partly offset by weak demand from other Eurozone countries. Now, with increased rescue efforts, this balance could turn again. In the short run, a stronger euro and somewhat higher interest rates should dampen German growth but in the long run the positive impact from a stabilised Eurozone should prevail.
Today’s Ifo confirms our view that the German economy could see a contraction in the third quarter. Up to now, the real economy held up rather well, despite gradually deteriorating confidence indicators. Even the third quarter started on a very positive note. While industrial production and new orders rebounded in July, only retail sales were down, illustrating the relative robustness of the economy. However, it is doubtful that the decoupling between hard and soft indicators can last for long.