Ifo: German business optimism fades
Bottom line: The German economy likely expanded yet again in April albeit at a slower pace and should continue to do so in the coming quarters, according to Ifo. However, expectations have eased in recent months suggesting that growth will be only moderate this year. Q1 GDP is on track for a gain of 0.3 percent QoQ.
Details: The Ifo business climate index declined by 3.3 points to 104.4 in April from 106.7 previously while consensus had only expected a decline to 106.2. The decline was equally divided between the current assessment and expectations components with the former falling to 107.2 from 109.9 while expectations dropped to 101.6 from 103.6. It is the second straight monthly drop in the Ifo business climate index (and the two components) and brings the index back to levels last seen in January (104.3).
The uncertainty about the euro area remains a key concern, including the political situation in Italy where 87-year old President Napolitano agreed to (and won the vote to) remain in office for another seven years last week after none of the other candidates could garner enough support. Furthermore, conditions for exporters continue to be challenging and have not been aided by the euro rallying more than 10 percent since the low back in the summer of 2012. The euro has, however, stabilised in the last few months (at levels similar to those in 4Q'11).
Despite the decline in Ifo, we expect Germany to defy the overall euro area recession this year and post growth similar to last year's (0.9 percent) though risks are mostly to the downside (due to the weak display in 4Q'12, which means a weak starting point for 2013). The foreign sector of the German economy will benefit from somewhat stronger global trade growth while domestic demand is expected to increase. There is not much need for fiscal consolidation - Germany has even managed to balance its budget two years ahead of time - and private consumption will be aided by a robust labour market, rising real wages, and generally sound household balance sheets.