Saturday, November 27, 2010

Review Europe Ifo: Unshakable – at least so far

Review Europe
Ifo: Unshakable – at least so far

The Ifo business climate index surged from 107.7 to 109.3 (UniCredit: 107.2; Consensus: 107.5), thereby hitting its highest level since reunification. Business expectations increased from 105.2 to 106.3. It was a record-high even by West German standards since 1982 when our time series begins. The current situation component jumped from 110.2 to 112.3. Sentiment in major sectors improved. Besides manufacturing, companies in retailing, wholesaling & construction became more optimistic once again.

Ever heard of the European debt crisis? Looking at the latest Ifo index suggests that German companies are currently shrugging off all these concerns and simply defy the bad headlines about Ireland & Co. Instead, they concentrate on the positive aspects of the current upswing, becoming more and more optimistic. We think that there are three major reasons for this breathtaking development. First, there are ongoing strong impulses for exporters from Emerging Asia and especially from China. Second, the German economy is not completely on its own within the EMU, although many peripheral countries are struggling. At least this is the message from this week's upbeat French PMI data. With an export share of more than 9%, France is the most important
single export market for German companies. It looks like as if German and French companies together are powering ahead, thereby reinforcing the upswing of each other. Third, momentum in Germany is not only strong but has become broader. The signs of a pick-up in consumer spending and investment activity are unambiguous.

Given the latest upbeat Ifo data, it is difficult not to become euphoric. The logic is simple: If companies keep being unimpressed by the European debt crisis and Emerging Asia will remain comparatively strong, it is hard to stop the German growth locomotive. We stick to our aboveconsensus forecast of 2½% GDP growth for next year.

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