The month after. After last month’s “wow” effect, Germany’s most prominent leading indicator, the Ifo index, shows some downward correction of too optimistic business expectations. The Ifo index dropped in March to 106.7, from 107.4 in February. Both, the current assessment and the expectation component decreased. While the current assessment component dropped to 109.9, from 110.2, expectations fell to 103.6, from 104.6. Despite today’s drop, the absolute level of all components still points to growth in the first quarter.
The German economy started the New Year on a positive footing. Hard data for January basically sent two messages: i) the economy is recovering from the fourth quarter contraction; and ii) the often called for rebalancing of the German economy is materialising. The January acceleration of private consumption, construction and exports once again showed that the German growth model is more than a pure export-oriented beggar-thy-neighbor model.
Looking ahead, however, a good start is no guarantee for a happy ending. While the fundamentals of the German economy remain sound and financing conditions are very favourable, several factors are currently putting a speed limit on the economy. In the short run, new uncertainties and tensions from the euro crisis, the never-ending fiscal cliff in the US and, last but not least, the weather could dampen the recovery. Disappointing new orders in January were already a first warning. In the longer run, ageing and the lack of new structural reforms are likely to take a toll on the economy.
Over the last couple of months, businesses and consumers shook off typical German scepticism and turned out to be real optimists. The Ifo actually recorded its biggest four-months jump since early 2010. Maybe it is this rage of enthusiasm which is, at least partly, behind the German government’s tough stance in the Cyprus affair. In our view, today’s Ifo rather marks a small downward correction of last month’s enthusiasm than a new downward trend. Nevertheless, today’s drop also indicates that relying too much on the German economy’s invulnerability could be dangerous.