Oops. It seems that German businesses always take a bit longer to digest the news but today’s Ifo suggests that German businesses have suddenly woken up to Brexit reality.
Germany’s most prominent indicator, the Ifo index, decreased sharply in August to 106.2, from 108.3 in July; the strongest monthly drop since May 2012. The drop was equally driven by decreases of both the current assessment and the expectations component. The expectations component is now at its lowest level since October 2014.
What we had feared could happen did unfortunately happen: German businesses continued a longer tradition of delayed reactions to single and unexpected events. It is not the first time that the Ifo reacts with a delay of one or two months to global events.
Despite today’s Ifo correction, the German economy’s virtuous circle is still continuing. However, without any new structural reforms and investments, it remains a virtuous circle on steroids. Not the kind of steroids that could lead to a ban from the global economy but stimulus that mainly stems from two – in Germany heatedly debated – factors: refugees and the ECB. The influx of refugees has led to the strongest government consumption since 2008 and 2009. At the same time, low interest rates and a weak currency continue to support private consumption, the construction sector and exports.
Investments, however, remain the weak spot of the German economy. Here, the ECB’s ultra-loose monetary policy has not (yet) led to any remarkable success. Even though loans to the corporate sector have finally started to increase again, deposits are growing at a much faster pace. According to the latest Bank Lending Survey, the demand for loans has already started to level off again, after strong appetite in the first half of the year.
All in all, today’s Ifo reading is a good reminder that the relative benign reaction of Eurozone data to the Brexit vote should not be taken as given. The negative confidence impact is for real.