Welcome sunshine. Germany’s most prominent indicator, the Ifo index, increased in May to 107.7, from 106.6 in April, and stands now at its highest level this year. At the same time, both the current assessment and the expectations component increased.
After a strong first quarter, the German economy should slow down somewhat in the current quarter. Today’s Ifo index suggests that any technical slowdown could be very limited. At least if corporate expectations come true. Interestingly, the domestic part of the economy is currently clearly on the bright side of life. While the manufacturing sector is still struggling to gain momentum, services, construction and consumption are booming. Earlier this morning, the latest reading of German consumer confidence showed that consumers’ willingness to spend is again as high as in Spring 2015 or in 2006 (ahead of a VAT increase).
Looking ahead, and even if many Germany find it hard to acknowledge, the economy’s virtuous circle will be artificially extended by the ECB. In the absence of any new structural reforms, low interest rates and low inflation will be the main drivers of continued strong domestic activity. The still weak euro at least partly helps mask structural problems in the German export sector. With the domestic economy set for more success stories, the biggest short-term risks seem to come from the outside. Uncertainties about the growth prospects for China and the US, the British referendum and economic stagnation in the Eurozone on the back of strengthening political populism could still spoil the German growth party. At least one potential short-term risk has been put away last night. The Eurogroup’s decision on Greece was bigger than expected as it not only calmed the situation until the British referendum but with the decision on some debt relief also prepared the grounds for a longer period of serenity and relaxation.
All in all, today’s Ifo index provides more comfort for optimists. Whether the improvement in expectations is the result of wishful thinking or fact-based optimism remains to be seen. One thing is for sure: the Ifo index confirms what earlier confidence indicators had suggested, that the worst nightmares of a global recession that spooked markets and economies in the first months of the year have clearly disappeared.