Monday, January 27, 2014

Strong Ifo reading increases German growth conundrum

German businesses remain diehard optimists. The January Ifo just increased to the highest level since July 2011 and stands at 110.6, from 109.5 in December. Both the current assessment and the expectation component increased, with expectations now at their highest level since February 2011. The small growth conundrum of the German economy continues. While soft indicators remain buoyant and both consumer and business confidence are close to all-time highs, hard data has been lagging behind and still is. The growth performance throughout 2013 was much weaker than soft indicators had suggested. This dichotomy worsened towards the end of last year, which saw an unexpected disappointing growth performance despite a new acceleration of sentiment indicators. Explanations for this new German conundrum are not easy to find and range from “the economy is simply not as strong as many think” to “the data are wrong”. Particularly the latter explanation got more attention recently. In our view, the truth is – as so often – probably somewhere in the middle. There are indeed plausible reasons to believe in an upward revision of some hard data. Many domestic activity data are often revised after their first estimates and an upward revision of activity in the construction sector, services and retail sales, particularly in the last months of 2013, seems possible. At the same time, however, it was net exports which weighed on German growth last year. These data are less subject of later revisions. Consequently, the poor export performance was rather a result of weaker demand from emerging countries and Eurozone peers than of bad data collection. Looking ahead, with a solid labour market, higher real wages, favourable financing conditions, the gradual investment pick-up, filled order books and low inventories, strong fundamentals still make a compelling case for a strong growth performance of the German economy this year. As long as latest problems in emerging markets do not worsen, the German growth conundrum should automatically end in the coming months.

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