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Blog Carsten Brzeski

Germany: The golden cycle that simply does not want to stop

The Ifo index has surged to its highest level since July 2011, suggesting that Germany’s golden cycle has entered yet another round.

Germany’s most prominent leading indicator, the Ifo index, increased once again in March. The Ifo stands now at 112.3, from 111.1 in February, the highest level since July 2011. Both the current assessment and the expectation component increased. The expectation component seems to have digested earlier concerns about the impact from the new US administration and has returned back to end-2016 levels.

Confidence indicators since the start of the year have indicated faster growth in the first quarter. Hard data, however, has up to now been rather mixed. While industrial production surged in January, new orders saw a drastic decline and retail sales also disappointed. Also, one of the strongest economic engines, the construction sector, is still stuttering. That came as the German economy was hit harder by the cold winter weather than most other Eurozone countries. As a result, it could take until March before the construction sector returns as a growth driver.

Looking ahead, the big question is whether hard data can make the soft data’s promises come true, or whether confidence indicators simply jumped the gun and start to adjust to a less buoyant reality. In our view, the truth will probably be somewhere in the middle, with the economy gaining further momentum in the months ahead, albeit with some changes in the growth drivers. While private consumption could start to weaken somewhat under higher inflation, the case for a pick-up in investment is currently strengthening. Equipment as a limit to production is currently at the highest level since 2014, while at the same time lending to the corporate sector has gradually increased through 2016. Best prerequisites for the long-awaited start of investment growth.

All in all, even though the German economy could still use some new structural reforms, today’s Ifo index illustrates that low interest rates, a relatively weak euro and continued government consumption should once again extend the current golden cycle.