Friday, November 23, 2012

German economy remains crisis-denier

Today’s GDP and Ifo readings have given some food for thought on the growth prospects of the German economy.

The second estimate of the statistical office confirmed that the German economy defied the euro crisis once again in the third quarter. GDP growth in the Eurozone’s biggest economy came in at 0.2% QoQ, from 0.3% in 2Q. Growth was driven by net exports, with exports up by 1.4% QoQ, government (0.4% QoQ) and private consumption (0.3%). Investments were down by 1.7% QoQ. Inventory reductions, however, illustrated further signs of crisis vulnerability.

Unfortunately, it looks as if these positive GDP data could soon be nothing more than the memories of the good old days. Signs of a further cooling of the German economy are increasing. Order books have become alarmingly thin, industrial production is dropping and German businesses have become downbeat. Earlier this week, a survey among businesses showed that for the first time since 2009, there was a majority of pessimists regarding the outlook for 2013. Uncertainty about the Eurozone was the most important factor hampering investment decisions.

However, any short-term cooling could turn out to be rather short-lived, as indicated by today’s Ifo data. The Ifo index surprised with an increase to 101.4, from 100.0 in October. This was the first increase since March 2012. The increase was driven by both the current assessment component (108.1, from 107.3) and expectations (95.2, from 93.2).

The increase came as a clear surprise but maybe only reflects typical German sobriety. Even if domestic demand should lose some steam due to a weaker labour market, the risk for the economy of falling off the cliff looks very limited. To the contrary, the creeping decoupling from the rest of the Eurozone – only 1/3 of German exports currently go to Eurozone peers – enables the economy to benefit quickly from any rebound of the global economy. In this regards, latest signs of improvement from the US and China were good news for German companies.

Solid fundamentals should spare the economy from the recessionary mix of structural reforms and austerity measures. The German economy might have lost its invulnerability but today’s numbers indicate that the economy should not join the race to the bottom most other Eurozone countries are currently in.

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