German economy ends year with high hopes

Nothing can ruin German business optimism. The December Ifo just increased to the highest level since February 2012 and stands at 109.5, from 109.3 in November. While the current assessment component dropped to 111.6, from 112.2, the expectations component increased to 107.4, from 106.3; its highest level since March 2011. With today’s Ifo, another exciting year for the German economy draws to a close. It was another growth rollercoaster ride as the heavy winter weather distorted economic data for several months. It took until the third quarter before the economy probably showed its true face, posting GDP growth of 0.3%. The start to the fourth quarter showed an interesting dichotomy. While soft indicators remain buoyant and are often still on an upward trend, hard indicators have failed to meet expectations. Industrial production dropped in October already for the second month in a row and the trade surplus has narrowed. Even retail sales disappointed. The economy is struggling to shift up a gear. Nevertheless, we still expect growth to pick up in the remainder of the year. Filled order books and the low level of inventories still bode well for industrial activity. Moreover, the levels of all available confidence indicators correspond with a much higher GDP growth rate than the latest monthly data indicate. The crucial question for the German economy in the coming months will now be whether soft or hard indicators will start to adjust. In our view, unless German businesses have slowly lost touch with reality, the economy should pick up steam again and cruise smoothly into the next year. With today’s Ifo, the German economy starts an early but well-deserved Christmas break. The next important macro data will only be released next year. The Ifo and other confidence indicators have created a crackling anticipation of the economy’s growth prospects going into 2014. Let’s hope that there won’t be a rude awakening after the holidays.