Ifo index drops in January, suggesting that German concerns about economic implications of the new US president have increased
Germany’s most prominent leading indicator, the Ifo index, started the year on a somewhat weaker footing, suggesting that German businesses are increasingly getting concerned about possible negative economic implications from the new US president. The Ifo index dropped to 109.8 in January, from 111.0 in December. The drop was driven by a sharp fall in the expectations component (to 103.2, from 105.6). The current assessment component, however, even increased to 116.9, from 116.7 in December.
Today’s Ifo reading shows an almost common pattern of German businesses reacting with a delay to global events. At the same time, however, Germany is getting increasingly concerned about the possible impact from US president Trump’s suggested trade sanctions. Almost 10% of all German exports go to the US. Last year, the US had become the single most important trading partner for Germany, a position that was held by France for many years. Possible trade sanctions from the new US administration would definitely harm German trade. Combined with the sharp fall of the pound sterling and Brexit uncertainty, more than 15% of all German exports could have a hard time in 2017. Up to now, it seems as if German companies and politicians are still in a period of regret but not yet in active problem-solving mode.
With trade looking into yet another difficult year, the German economy will continue to be highly dependent on domestic demand, on the back of low interest rates and the strong labour market. Particularly the construction sector should remain an important growth driver in 2017. Maybe one of the few upsides of many uncertainties in traditional export destinations could be a rethinking or reorientation of the economy, finally leading to a kick-start of investments at home.