German Ifo increases in September

Stabilising at a high level. Germany's most prominent leading indicator, the Ifo index, increased marginally in September to 107.7, from 107.6. While the current assessment component dropped slightly, expectations improved again. Today's Ifo provides further evidence that fears about a sharp slowdown of the German economy in the second half of the year were overdone. As so many quarters before, the third quarter started with opposing signals. While confidence indicators point to continued strong growth, hard data disappointed in July. The sharp drop of industrial production and weak retail sales have again casted doubts about the strength of the German economy. In our view, these doubts should soon fade away and today's Ifo provides welcome support for this view. The gradual filling of order books since the beginning of the year combined with some inventory reduction 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. On the second day after the federal elections, all political parties are still digesting the results, preparing for the upcoming negotiations to form the next government. Yesterday’s comments from leading politicians suggest that the only feasible option is a grand coalition between chancellor Merkel’s CDU and social-democratic SPD. However, negotiations won’t be easy and could be cumbersome as the SPD will play "hard to get". The economy will obviously hardly provide any arguments to speed up the negotiations: it continues to cruise along smoothly.