No panic (yet). German businesses do not seem to be extremely shocked by the British Brexit vote. This at least is the message today’s Ifo index is providing. Germany’s most prominent indicator, decreased in July to 108.3, from 108.7 in June, and still stands at its second highest level this year. At the same time, the current assessment component increased to the highest level since August last year. The only Brexit-effect in today’s Ifo can be identified in the expectations component, which dropped to 102.2, from 103.1 in June.
At first glance, German businesses have reacted lightly to the Brexit vote. However, let’s not forget that regularly in the past, German businesses made a sleepy impression in the imminent reaction to ground shaking events. It would not be the first time that the Ifo reacts with a delay of one or two months to global events. Therefore, it is in our view too early to regard the Brexit-vote as a non-event for economic sentiment in Germany.
According to a recent survey amongst German business exporting to the UK, German exports to the UK could fall by 5% next year in the wake of the Brexit vote. Given that the UK accounts for around 7% of all German exports, this damage still looks manageable for the economy as a whole. Interestingly, German exports have already been hit by pre-Brexit anxiety as exports to the UK were down by almost 8% in May and June, compared with the first quarter.
Turning to the general outlook for the German economy, all data available so far points to growth slowdown in the second quarter, admittedly after an extremely strong first quarter. Looking ahead, the dichotomy of the German economy should continue. Weak industrial production and an export sector suffering from multiple economic and geopolitical uncertainties stand in stark contrast with booming services, construction and consumption. The latter could be even stronger if domestic investment would finally pick up. In this context, the new wave of uncertainty poses the biggest risk for the German economy. It is the uncertainty stemming from the Brexit vote, casting doubts about the future of Europe. But it is also the uncertainty stemming from the latest attacks in Germany. Within one week, Germany faced four – though totally different – violent incidents. An alarming situation. One year ahead of the next national elections, the political sentiment and landscape could still be subject of significant changes.
All in all, even if the British Brexit vote is not (yet) the big spoilsport for German economic sentiment, the stockpiled number of both political and economic uncertainties pose a severe risk for Germany’s growth outlook.