Friday, February 22, 2013

Ifo signals German economy returns to league of its own

The wow effect. Germany’s most prominent leading indicator, the Ifo index, increased in February for the fourth month in a row and stands now at 107.4; its highest level since April last year. Both, the current assessment and the expectation component improved significantly. The headline index saw its strongest monthly increase since July 2010, the expectation component the strongest monthly increase since July 2009. Nothing seems to be able to stop German business optimism.

Earlier today, the contraction of the German economy in the last quarter of 2012 was confirmed. As expected, exports turned out to be the main drag on the economy. Stable private and public consumption illustrated the sound fundamentals of the economy.

Looking ahead, evidence is increasing that the contraction in the fourth quarter has been a one-off which never felt anything near a recession. With the improved outlook for the US and China, prospects for German exporters are also clearing off. The 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 most other Eurozone countries remain stuck in recessionary territory, preoccupied with structural reforms and austerity, German businesses are surfing on the wave of optimism. German optimism could become reality as the main drivers behind the fundamental decoupling, or unique selling points of the economy, remain in place in 2013: export diversification, a balanced budget, labour market strength and favourable financing conditions.

A day like today once again illustrates the divergences across the Eurozone. While most other Eurozone countries are moaning under the burdens of reforms, austerity and recession, the German economy continues playing in a league of its own.

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