Today's edition of the Saxo Morning Call features the SaxoStrats team discussing the continuing weakness of the US dollar as commodity prices recover ground and in the wake of key US equity indices hitting all-time highs Thursday.
Article / 26 October 2015 at 10:20 GMT

German economy shakes off the scandals

  • Volkswagen- and refugee-centric headlines obscure solid German data
  • Ifo economic index beats expectations for fourth month in a row
  • Print signals GDP growth of up to 2.5%, well ahead of Q2'15
The headlines may be cautious, but according to the latest Ifo release, 
the German economy's performance is anything but. Photo: IStock

By Mads Koefoed

Germany has found itself in the headlines a lot recently, but not for its economy. Rather, the press has made great hay of the Volkswagen emissions debacle as it is getting more and more expensive for the embattled carmaker every day.

Also in the news is the large influx of refugees that has followed German chancellor Angela Merkel's pledge to suspend the ordinary European Union procedures. Meanwhile, the performance of the euro area's leading economy has been mostly forgotten, but that has not stopped it going quietly about its business...

... As underlined by today's Ifo report, in fact, the German economy is doing just fine.


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The IFO report, which offers a broader view into the German economy's machinery compared to the PMI reports (as it covers some 7,000 companies), beat expectations yet again today. In fact, this is the fourth straight monthly beat on the headline Ifo business climate index, coming in as it did at 108.2 (versus 107.8 expected and 108.5 prior). 

A reading of 108.2 corresponds to GDP growth of 2.0 to 2.5%, well above the most recent GDP print of 1.6% for Q2 (the Q3 data will be released on November 13).

More importantly for the near-term outlook, the expectations sub-index both beat expectations and rose month-on-month. In October, the expectations index hit 103.8 compared to 103.3 a month ago and 102.4 expected. 

The index has trended higher since the summer months and stands just shy of its March high of 104. The expectations index leads GDP by one to two quarters, supporting our view that the German economy – aided by the (fading) temporary effects from a low euro and low commodity prices – will improve from the summer doldrums.

Will growth be substantially higher in the coming quarters? No. But the concerns voiced about the economy's supposed dwindling performance are also too negative, and growth should pick up with the upcoming Q3 GDP release to close to 2% and stay close to this growth rate in the next few quarters at least. 

The fading euro and energy prices comprise one part of the explanation, but another is that the German economy is structurally sound with a tight labour market where real wages are growing. This, in turn, is translating into private consumption growth of 2% at the moment – twice the average of the last 20 years. 

At the moment, and headlines quite aside, the German economy is doing just fine.

— Edited by Michael McKenna

Mads Koefoed is head of macro strategy at Saxo Bank


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