Carsten Brzeski's blog

Early gift giving in Germany

Ifo index ends the year at highest level since February 2014

Germany’s most prominent leading indicator, the Ifo index, closes the year with another improvement. The Ifo index increased to 110.0 in December, from 110.4 in November. The increase was mainly driven by a better current assessment component (116.6, from 115.6). The expectations component remained almost unchanged. The December increase suggests that German businesses are not (yet) afraid of negative economic implications from the new president in the US.

Today’s Ifo was the last important macro indicator for the German economy this year. As always, the upcoming Christmas break is a good occasion for a reflective moment. A look at the German economy through the rear mirror. A look which shows an impressive, though slightly slowing growth performance. The German economy has continued its recovery and defied many external risks and turmoil, like Chinese stock market turbulences and eoonomic slowdown, low oil prices, Brexit and continued weakness in many Eurozone countries. The key for economic success has been domestic demand. Strong domestic demand on the back of a strong labour market, low inflation, low interest rates and higher wages, partly fueled by the ECB and refugees.

Unfortunately, as with so many good things, the current positive growth cycle is also coming to an end. Gradually, not abruptly. Looking into 2017, the upside for the German economy is that the main growth drivers of 2016 should still be the main growth drivers of 2017, only weaker. Construction, the best-performing sector currently, should continue to benefit from low interest rates and excess demand for housing in urban areas. Consumption should continue to thrive on the back of the strong labour market, higher real wages and low interest rates. Finally, government consumption should remain high as the influx of refugees requires continued expenditure. However, these three drivers are unlikely to gain momentum as interest rates are unlikely to drop further, inflation is gradually moving upwards and the labour market has reached its natural rate of unemployment.

Real risks to the German outlook mainly seem to stem from the outside. The still unknown impact from president-elect Trump on trade and economic policies, the ongoing Brexit uncertainty and renewed political tensions in Europe due to several elections or a new flaring up of the Greek crisis are in our view the biggest risks for 2017. On top of everything, national elections in Germany do not pose a risk in itself but should clearly absorb time that could be used to implement new reforms and investments.

All in all, it very much looks as if 2017 could be the slimmed down version of 2016. The growth ingredients should remain the same but it will be a bit less of everything. A good recipe to lose some weight after the holidays but not the best recipe for more economic growth. Merry Christmas.