Tuesday, August 27, 2013

German good-news-show continues

More good news. The German economy continues surfing on the waves of optimism. Today’s Ifo index fits perfectly into the set of positive and encouraging latest macro data. Germany's most prominent leading indicator, measuring business sentiment, increased to 107.5 in August, from 106.2 in July. Both, the expectation and the current assessment component improved, providing further signs that fears of a sharp slowdown in the second half of the year should have been overdone.

To the contrary, prospects for the German economy remain good. The gradual filling of order books since the beginning of the year combined with some inventory reductions bodes well for industrial production in the coming months. Moreover, the recoveries of the US and UK economies, signs that the Chinese landing is a soft rather than a hard one and the tender stabilization of the Eurozone economy should support German exports. At the same time, with the wage increases of the last two years and record-low unemployment private consumption should also remain an important growth driver. The great unknown for the German growth outlook is private investment. The increase in the second quarter was welcome news but it is too early to tell whether this investment recovery is here to last.

With the economy cruising along rather smoothly, all eyes will move to the upcoming elections on 22 September. Latest opinion polls show that the result of the elections is still far from certain. In fact, it could become a neck-and-neck race between the current coalition (Angela Merkel’s CDU and her liberal coalition partner) and the two major opposition parties (the social-democrats with Merkel’s challenger for the chancellery, Peer Steinbrueck, and the Green Party). According to latest polls, Merkel’s coalition enjoys a lead of around 5 percentage points but does not have enough votes to form the next government. So far, the election campaign has been rather dull. This should change in the next weeks. However, with the latest economic data, it will be very hard to make Germany’s economic performance part of the campaign. Contrary to a famous campaigning slogan from Bill Clinton, it is not the economy which will decide the German elections, stupid...