Germany’s most prominent leading indicator, the Ifo index, remained almost unchanged in November. At 110.4, from 110.5 in October, the Ifo index stands close to all-time highs. While the current assessment component improved, expectations weakened somewhat.
Since the first Brexit shock, the Ifo index has staged an impressive comeback, suggesting that the summer slowdown of the entire economy was only a blip and not a new trend. However, we think that some caution is well-placed when interpreting the Ifo index. In recent months, the improvement in the headline Ifo index has been mainly driven by stronger sentiment in the manufacturing sector. A sector, which has not really shown strong signs of acceleration in the hard data so far. To the contrary, the ongoing stagnation in new orders and industrial production combined with new risks emerging in Germany’s main export destinations, suggest that the latest Ifo readings could be too good to be true.
Despite the strong Ifo reading, less than one year ahead of the important national elections, the German economy has entered a risky stage. The economy’s virtuous circle is running on its last leg and is in fact artificially extended by the ECB’s ultra-loose monetary policy and the refugee-related increase in government spending. As a result, domestic consumption and the construction sector have become the two most important growth drivers. At the same time, however, the lack of new structural reforms and investments combined with what looks like a more structural slowdown in global trade should hinder economic growth to live up to its full potential in the period ahead.
In sum, today’s Ifo reading points to a rebound of the economy in the final quarter of the year. However, some caution is required as recent events have shown that surveys are currently not the best indicators for actual results.