Friday, May 24, 2013

Ifo points to growth acceleration in Germany

The day ahead of the all-German soccer Champions League final looks like an all-German macro day. Third important data released this morning was the Ifo index. Germany’s most prominent leading indicator, measuring business sentiment, increased sharply to 105.7 in May, from 104.4 in April. While the expectation component remained unchanged, current expectations spurred to 110, from 107.2 in April; the strongest monthly increase since July 2010.

Despite many negative readings from the Eurozone, the last two months have delivered a couple of positive news from the German economy. New orders have increased in February and March, industrial production improved and companies increased their production plans. In fact, since the beginning of the year, we have seen a rather contradictory up-and-down of soft and hard data and it almost required a fog lamp to predict the future path of the German economy. Now, the fog is clearing up. A weather-inflicted catching up of industrial activity, particularly construction, combined continued private consumption could deliver decent growth in the second quarter.

However, the big unknown in the equation remains the export sector. Earlier this week, the Association of German Chambers of Commerce and Industry released the results of a survey showing that German exporters lost some optimism. ONly 30% expect export volumes to increase, while some 10% even expect a decline. The stagnation of the French economy, accounting for around 10% of German total exports, and worrying signals from China could prevent a sharp pick-up in exports. Fortunately, the US economy, the biggest non-euro trading partner, is currently doing better than expected.

All in all, today’s data bode well for the short-term. Growth should accelerate in the second quarter, on the back of domestic demand. However, on the day ahead of the all-German Champions League final, let’s not forget that the German economy without exports is like Barcelona without Messi: a good team but not a champion.

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