After the sharpest monthly increase since July 2010, German businesses leave analysts almost clueless. With the highest reading since May 2014, the prominent Ifo index suggests that Brexit fears have disappeared as quickly as they had emerged.
Germany’s most prominent indicator, the Ifo index, increased sharply in September to 109.5, from 106.2 in August. The increase was equally driven by surges in both the current assessment and the expectations component.
German confidence indicators are currently sending mixed and sometimes even opposing signals. After the latest drop in the PMI, today’s Ifo clearly stands out as a positive surprise. At the same time, while the PMI services component has been on a sharp downward correction in recent months, the Ifo’s services component has remained relatively strong. All in all, disappointing hard data in July and falling soft data since the Brexit vote had provided further evidence that the German economy was losing momentum. Today’s Ifo index suggests that at least the Brexit fears have disappeared as quickly as they had emerged.
Despite the strong Ifo reading, one year ahead of the important national elections, the German economy has entered a risky stage. The economy’s virtuous circle is running on its last leg and is in fact artificially extended by the ECB’s ultra-loose monetary policy and the refugee-related increase in government spending. As a result, domestic consumption and the construction sector have become the two most important growth drivers. At the same time, however, the lack of new structural reforms and investments combined with what looks like a more structural slowdown in global trade should hinder economic growth to live up to its full potential in the period ahead.
In sum, today’s Ifo reading gives lots of food for thought about the real state of the German economy. Whether the strong reading is the start of another golden economic Fall or just a flash in the pan is too early to tell.