Ifo index reaches yet another record high in June, showing that the strong recovery will continue.
Germany’s most prominent leading indicator, the Ifo index, increased for the fifth month in a row, reaching another new all-time high in June. The Ifo stands now at 115.1, from 114.6 in May. Both the expectations and current assessment component improved. Some more relief and eu(ro)phoria after the French parliamentary elections but also a brightening outlook for the German industry are the main drivers of yet another stronger Ifo reading.
The industrial revival could be the surprise story of the year in the German economy. Almost unnoticed, the industry has returned from sluggish to buoyant. This is not only reflected in the Ifo subcomponents, where the Ifo manufacturing sector has picked up significant speed since mid-2016, converging with sentiment in the service sector. Also, looking ahead, there is increasing evidence that investment could also pick up in the course of the year. The combination of strong orders at hand and low inventories is currently as good as in mid-2006 and late-2010. Capacity utilization has, almost unnoticed, increased to the highest level since late 2008. And, according to surveys, companies currently consider equipment as a limiting factor to production as pressing as in the first quarter of 2012, even though labour is still mentioned as the most important limiting factor. It looks as if the industry is the lagging, not leading, indictor in the current recovery.
As the domestic economy gaining even more momentum, the biggest risks for the German economy still come from abroad. Protectionist measures from the US, a weakening of the UK economy in the wake of the Brexit negotiations and a slowdown of the French economy in the first stage of reforms under president Macron look like the biggest threats to the German economy.
With the economy on autopilot, more and more attention by the German public but also financial markets should be on the slowly starting election campaign in the next three months. Last weekend, the Social-Democrats tried to revive their faltering campaign, with their leader Martin Schulz pledging to pursue the creation of a United States of Europe. A remarkable change in the campaign, as up to now, Schulz had been rather silent on his former passion Europe, probably fearing that his support for Eurobonds and other forms of European transfer in his time as president of European Parliament could backfire. Whether the topic ‘Europe’ could revive Schulz’s faltering campaign remains to be seen. Especially as chancellor Angela Merkel’s recent embracing of Macron’s new pro-European spirit have not made things easier for Schulz.
All in all, it seems as if the sky is no longer the limit for the Germany economy. Despite the absence of any new structural reforms for years, today’s Ifo signals continued strength of the German economy, making it increasingly unlikely that economic topics can decide the September elections.