Ifo drops in June on back of weaker expectations

Levelling off. German business confidence dropped in June on the back of weaker expectations, illustrating that the earlier hard-headed optimism is slightly crumbling. Germany’s most prominent leading indicator, the Ifo index, just decreased to 109.7, from 110.4 in May. While the current assessment remained unchanged, the expectations component dropped to 104.8, from 106.2 in May. It is the first time since Spring 2013 that the Ifo has dropped for two months in a row. However, despite today’s drop the absolute level of the Ifo index is still high and there is clearly no reason to panic. The German economy continues to send mixed signals. On the positive side, the strong fundamentals with record high employment, low unemployment rates and extremely favourable financing conditions should ensure continued solid growth in the months ahead. Earlier today, the German statistical office released the latest wage growth data. On the year, real wages were up by 1.3% in Q1, the strongest increase since the first quarter of 2011. Interestingly, wages in the part-time sector increased the strongest (+4.6% QoQ in nominal terms) and at the same time the wage gap between the former West and East German states is narrowing further. Nominal wages in the former East increased by 3.3% QoQ and 2.4% QoQ in the former West. Overall, low inflation, wage increases and the introduction of the minimum wage bode well for private consumption this year. Despite the strong fundamentals, there are currently however also some negative factors weighing on German growth prospects. Two disappointing months in a row for industrial production suggest that the Ukrainian conflict and the Chinese slowdown could still have a stronger impact on the real economy than confidence indicator made us believe and that the Eurozone recovery is not (yet) strong enough to have a positive impact on the German industry. Moreover, France’s economic problems should not leave Germany unharmed, as France is still Germany’s most important trading partner. With the US and the UK going strong, there is no reason to start singing swan songs on German exports. However, the normally very reliable growth engine could sputter longer than expected. With the reversal of favourable one-offs from the first quarter (ie the strong growth contribution of inventories and the mild winter weather), a growth correction the second quarter is almost inevitable. However, today’s Ifo and particularly the unchanged current assessment component suggest that the slowdown will rather be of a technical than of a fundamental nature. Looking beyond short-term fluctuations, the bright prospects for domestic demand should offset any possible headwinds for exports from the far East and the nearby West.