Monday, February 24, 2014

En route for a gold medal?

German businesses remain diehard optimists. The February Ifo just increased to the highest level since July 2011 and stands at 111.3, from 110.6 in January. While the expectations component weakened somewhat, the current assessment component reached its highest level since April 2012. German business optimism seems to be contagious and slowly but surely the latest conundrum between soft and hard data is fading away. Better-than-expected GDP data in the fourth quarter marked an important first step, hard data in the coming weeks should confirm the catching up of the real economy. Particularly the industrial backbone of the economy should strengthen again. The combination of filled orders books and low inventories bodes well for industrial production in the coming months. It does not come as a surprise that reportedly big German companies have increased working hours to reduce latest backlogs. Moreover, the construction sector, driven by the mild winter weather, and domestic investment, driven by government investment and a first tender start of business investment, will be growth-supportive throughout 2014. Finally, the strong labour market and latest wage increases should further back domestic demand, even though the 2013 drop in real wages indicates that a spending spree will be hard to find. Of course, there are also risks. An unexpected slowdown, further emerging market turmoil and a Chinese hard landing have often been mentioned as the main threats to the German economy. In our view, particularly the worries about the US economy should disappear quickly. In fact, the US economy should quickly return as one of the main drivers of German export growth this year. As regards the other risks, the negative impact from emerging market turmoil should remain limited. As long as China remains relatively stable, German exports should remain relatively unharmed. India, Brazil, Turkey and Argentina are not more important as export destinations than Belgium. While some performances of Germany’s Olympic athletes over the last two weeks might have disappointed, the economy’s performance is again en route for a gold medal.

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