Wednesday, April 24, 2013

Ifo drops sharply in April

Sharp correction. The full impact of the Cyprus bailout and new concerns about global growth have led to a clear downward revision of German business expectations. Germany’s most prominent leading indicator, the Ifo index, recorded the sharpest monthly decline since May 2012, dropping to 104.4 in April, from 106.7. Both, the current assessment and the expectation component decreased sharply. While the current assessment component dropped to 107.2, from 109.9, expectations fell to 101.6, from 103.6. Despite today’s drop, the absolute level of all components still points to growth in the second quarter.

The start of the New Year has been positive, though a bit choppy. Available hard data basically sends two messages: i) the economy recovered from the fourth quarter contraction; and ii) the often called for rebalancing of the German economy is materialising as both private consumption and net exports should have been growth drivers in the first quarter. The big unknown is the weather impact on construction and industrial production. Against the background of still very harsh weather conditions in March, the jury on whether or not the economy left contractionary territory in the first quarter is still out. In our view, it should have.

Looking ahead, it almost requires a fog lamp to predict the future path of the German economy. Available hard and soft data send a huddle of indications. Order books are gradually filling and inventory reductions have come to an end, while at the same time confidence indicators have started to fall again. In the first months of the second quarter, the dichotomy between soft and hard data could continue, though with a bit of a twist. A weather-inflicted catching up of industrial activity could go hand in hand with weaker confidence indicators.

However, looking beyond this weather-driven catching up, today’s Ifo (and yesterday’s PMIs) signal trouble ahead for the Eurozone’s biggest economy. If this trend continues, pressure could build on the German government to consider fiscal stimulus. This time not so much for the sake of any Eurozone rebalancing but for the sake of pure economic selfishness. However, this is highly hypothetical and will, in our view, definitely not happen before the elections. Why? Because any political decision would hardly have a tangible impact on the economy before the elections. In the short run, worsening prospects for the German economy could at least increase the silent support for more ECB action. A rate cut and more non-standard measures will not kick-start economies but weaken the euro exchange rate. Particularly a weaker euro could be a welcome relief for German exporters. Bundesbank president Weidmann’s silent blessing of a ECB rate cut could become louder.

All in all, this week’s confidence indicators send a warning signal that 2013 is not 2009. Any rebound of the German economy after the contraction will be much bumpier and weaker than four years ago.

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