German businesses remain a bunch of optimists. Germany’s most prominent leading indicator, the just released Ifo index, dropped to 108.7 in December, from 109 in November. While the expectations component remained unchanged, the current assessment component decreased to 112.8. Despite the small drop, German confidence ends the year at a high level. Latest uncertainties, stemming from the attacks in Paris, geopolitical conflicts or the Chinese slowdown, as well as home-made challenges like Volkswagen or the refugee influx can hardly destroy German businesses’ optimism.
Over the last months, strong confidence indicators and rather sluggish hard data posed a bit of a new conundrum in the German economy. A less common closer look at the Ifo sectors, however, offers some explanations for this conundrum: while the manufacturing sector has been treading water throughout the year and weakened in recent months, the construction, retail and wholesale sectors have been driving the strong Ifo index performance in recent months. Another piece of evidence that the German economy is currently mainly driven by domestic factors. Moreover, the fact that the Ifo index for the service sector has recently climbed to its highest level since early 2005, provides further evidence for the decoupling of manufacturing and services. A trend not only observed in Germany.
Despite another very turbulent year with the Greek crisis, the Chinese slowdown, the refugee influx and increased geopolitical tensions, the German economy continued its solid growth performance. Domestic demand, and in particular private consumption, has become an important growth driver. Looking ahead, the economy should continue its current positive, though not breathtakingly strong, momentum next year. The divide between a strong domestic part and a rather struggling industrial and external part, however, seems to continue.
All in all, the German economy looks set for another solid growth year. However, under the surface of solid growth, uncertainties and problems are increasing.