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Carsten Brzeski's blog

Germany: Digesting Trump

Ifo index recovers in February, suggesting that German concerns about economic implications of the new US president have slightly softened.

Germany’s most prominent leading indicator, the Ifo index, rebounded somewhat in February, suggesting that German businesses have digested initial concerns about the possible negative economic implications of the new US president. The Ifo index increased to 110.0 in February, from 109.8 in January. Both the current assessment and expectation component increased.

The higher they rise, the deeper they can fall. This currently seems to be the main theme of Germany’s confidence indicators, all pointing to strong current growth but increasingly worsening expectations. Falling sentiment indicators, however, are not only the result of acrophobia. They also reflect an increasing concern of German businesses about the possible impact from US president Trump’s proposed trade sanctions. Yesterday, Treasury Secretary Mnuchin did not bring much comfort by reporting from a discussion with IMF Managing Director Lagarde, underscoring his expectation “that the IMF provide frank and candid analysis of the exchange rate policies of IMF member countries”. This was another message that Germany and its exports to the US could continue to be on the new US administration’s radar screen for a while. It would go too far to label the new US administration as the biggest risk to Germany’s economic outlook, but with almost 10% of all German exports going to the US and another 5% going to the UK, it is hard to see how exports could become a strong growth driver in 2017.

With trade facing 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. The construction sector in particular should remain an important growth driver in 2017. Maybe one of the few upsides of the 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. When later today, the European Commission will present its economic recommendations in the context of the European Semester, the US criticism will very likely be repeated; only in a more polite way.

Meanwhile in Germany, headlines are increasingly dominated by the September elections. The trade surplus and currency manipulation will in our view not become a topic at the elections, but European calls for greater domestic investment could eventually feed into the political debate. While first polls showing that the SPD was leading the CDU and that Martin Schulz’s popularity was higher than Angela Merkel’s, were widely dismissed as being biased, recently a series of polls confirmed these first results. It looks as if the elections will become a neck-and-neck race. A side-effect of both major parties at current levels in the polls is that forming a coalition, other than the current so-called grand coalition, could become highly complicated.