German economy powering ahead

Today’s PMIs provide further evidence that the German economy is rather gaining than losing momentum. The flash composite index increased to 53.4 in August, from 52.1 in July; its highest level since January. PMI services increased to 52.4, from 51.3, while the PMI manufacturing improved 52.0, from 50.7 in July. The PMI manufacturing currently stands at its highest level in more than two years. After the strong second quarter, many observers had predicted a quick slowdown of the German economy in the second half of the year. Up to now, it looks as if the economy is gaining rather than losing momentum. German confidence is not only benefitting from strong domestic economic activity and hopes of a soft and not a hard landing of emerging economies but also from the latest improvements in the Eurozone. It looks as if new growth hopes for the rest of the Eurozone are stimulating German confidence, which in turn could lead to higher German economic growth and could eventually become growth-supportive for the Eurozone. Obviously, it is far too early to call this the beginning of a virtuous circle but the current positive – at least psychological – interaction between Germany and its Eurozone peers could set off positive knock-on effects. Turning back to the German economy, today’s PMIs indicate that the Eurozone’s biggest economy is powering ahead. The expected slowdown after the exceptionally strong second quarter should be mild. Against the background of strong economic growth, the latest excitement in the German election campaign could also quickly disappear again. As long as most Germans are not personally affected by the euro crisis, disgust about a possible third bailout package for Greece should, in our view, abate quickly.