Monday, June 24, 2013

German economy cruises along smoothly

Nice and steady. The German economy seems to cruise along nice and steady, defying any growth concerns. Germany's most prominent leading indicator, the Ifo index, increased to 105.9 in June, from 105.7 in May. As expected, the current assessment component dropped slightly to 109.4, from 110 in May, while the expectation component increased to 102.5, from 101.6.

Since the start of the year, the German economy has gone through several ups and downs with an almost unprecedented dichotomy between soft and hard data. The harsh winter weather, the Cyprus bailout and now the floods have made it harder than usual to forecast the path of the German economy. Strong soft data at the beginning of the year was not followed up by strong growth. The external one-offs delayed the rebound of the economy. Judging from available hard data, this rebound should unfold in the second quarter. Industrial production surged, the construction sector more than offset the entire output losses caused by the harsh winter weather and exports regained momentum. Only private consumption seems to have taken a breather.

Looking ahead, main risks for the German economy come from the outside, not from the inside. Domestic demand has become something to fall back on and should remain solid this year, driven by low inflation, low interest rates and latest wage increases. The main risks for the German economy remain stagnating growth in its main Eurozone trading partners, above all France, and a hard landing of the Chinese economy. Contrary to common belief, even Abenomics and the recent depreciation of the yen hardly pose a risk for German exports. German and Japanese exports stiff differ significantly in terms of product and geographical specialisation. This is reflected in the very low weight of the Japanese yen (roughly 3%) in Germany’s nominal effective exchange rate against 41 major trading partners. Just to illustrate: while the euro gained more than 20% against the yen since December, Germany’s real effective exchange rate has appreciated by 0.5%. Admittedly, the weaker yen could put some pressure on some German exports to Asian countries but at the macro level Abenomics is no reason to change the German growth outlook.

In sum, it is not overly exciting anymore but today’s Ifo simply confirms the well-known story that the German economy is cruising along smoothly.

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