Wednesday, March 25, 2015

German Ifo continues upward trend in March

The gradual improvement continues. Germany's most prominent leading indicator, the Ifo index, just increased for the fifth month in a row to 107.9 in March, from 106.8 in February, indicating that the economy has gained further momentum. While the current assessment component improved to 112.0, from 111.3, expectations increased to 103.9, from 102.5 in February. Optimism has returned to the German economy. Strong growth in the fourth quarter of 2014, combined with low energy prices and the weak euro exchange rate have boosted confidence in the economy. However, before getting overly enthusiastic, one should keep in mind that hard data at the beginning of the year were less impressive than soft data. Moreover, today’s Ifo index is still only slightly above its average of the last five years. Looking ahead, the role of domestic demand as an important growth driver of the German economy should increase again this year. The strong labour market, wage increases, low inflation and de-saving on the back of record low interest rates should lead to strong consumption. In addition, exports should also pick up further as a result of the lower euro. The only unknown for stronger domestic demand is private investment. Here, favourable financing conditions have not yet led to a significant increase. The main reasons for still muted investment are probably the lack of strong incentives and continued uncertainty, the latter stemming the ongoing Greek crisis and the Russian-Ukrainian conflict. Consequently, the main risks to the positive German outlook come from the outside world. All in all, it looks as if the ECB and QE enable the German economy to extend its golden cycle without any new reforms. In fact, the economy is like a sailboat which only needs to hoist the sail and lean back to relax. Strong tailwinds could bring the strongest economic performance since 2011.

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