Ifo points to quick end of German contraction

The crisis is over. At least in Germany and at least if one believes in the forecasting power of the Ifo. Germany’s most prominent leading indicator, the Ifo index, increased in January for the third month in a row and stands now at 104.2; its highest level since June last year. Both, the current assessment and the expectation component improved. Particularly the improvement of expectations is remarkable. The combined improvement in December and January was the strongest 2-months improvement since the summer of 2009.


The contraction in the fourth quarter of 2012 seems to be short-lived. With biggest fears of a Eurozone break-up fading away and the improved outlook for the US and China, prospects for the German economy are also clearing off. Inventory build-up seems to have come to an end and order books have started to thicken again. In fact, it looks as if the gradual decoupling from the rest of the Eurozone is continuing. While business confidence has dropped in other core Eurozone countries like France and Belgium, German businesses are surfing on the wave of optimism. Is this the start of a core meltdown? German optimism could turn into reality as the main drivers behind the decoupling, or unique selling points of the economy, remain in place in 2013: export diversification, labour market strength and favourable financing conditions.

With last weekend’s elections in Lower Saxony, domestic politics have finally reached the forefront of Germany’s main themes of 2013. Normally, growth and elections go hand in hand. However, it looks as if strong growth of the past years and the expected recovery are rather taken as a given than an achievement of Merkel’s coalition. Stupid or not, it looks as if the economy will not be an active campaign worker for chancellor Merkel. If the recovery unfolds, it is taken for granted. If the recovery does not unfold and unemployment starts to increase, the opposition looks likely to benefit. It currently looks difficult for chancellor Merkel’s coalition to win the September elections purely on the country’s economic performance.

All in all, today’s Ifo index nicely illustrates the green shoots in the German economy. Even if the current harsh winter weather might delay the blossoming out somewhat, growth should return, leaving the contraction of the fourth quarter quickly behind.