Germany: Ifo surprises on a positive note in January

Thu, Jan 24 2008, 13:17 GMT
by Niels-Henrik Bjørn

Danske Bank A/S


The German Ifo index, which measures German business confidence, once again surprised on the upside in January. The main index rose to 103.4 from 103.0 (expected 102.3). Current conditions slipped only a little, while expectations actually rose. The rise in expectations is a positive surprise given the turmoil on the financial markets, which normally tends to depress expectations. On the other hand, the reading is in line with strong orders and labour market figures, and continued robust earnings growth, which normally correlate with the ifo index.


The reading has added to the positive sentiment on equity markets today and pushed up rates and yields.

The reading is consistent with the strength in global industry outside the US. In emerging markets, the manufacturing cycle has strengthened since last summer – a cycle which we expect to peak over the next three months. The strengthening of manufacturing in these countries means that German exports and manufacturing are doing well, and according to the Ifo institute, manufacturing was one of the sectors pulling up the entire index. Note also that the reading is consistent with incoming manufacturing orders, which have been strong during Q4 last year, and this suggests that we could see decent growth in Q1 in the German economy. Finally, note that we do not think that the strong euro will be a large problem for German exporters due to the internal cost improvement over the last few years.

Construction also pulled up the index. The German construction sector is to some extent out of sync with the global housing cycle. Commercial buildings in particular are enjoying tailwinds. Some of this is also a structural change following 10 years of recession in the construction sector following the crisis after the re-unification of Germany.

Essentially, it is the strength of the emerging markets and the restructuring of the German economy, which will determine to which extent the German and Euroland economy can decouple from the developments in the US. We expect this decoupling to become less and less evident as consumer demand in Euroland will suffer from falling real wages, and as Eastern Europe gears down.

We maintain our forecast of two rate cuts from the ECB in the second half of 2008. The reason behind our forecast remains the same: Firstly, continued risk aversion in the financial markets, secondly that the US economy will still be mixed in H2 08, thirdly that Eastern European growth will gear down, and finally that wage negotiations this spring will not result in strongly rising wage growth.

Published on  Thu, Jan 24 2008, 13:28 GMT

Danske Bank  | Holmens Kanal 2-12, DK-1092 Copenhagen
http://www.danskebank.com/ | danskeresearch@danskebank.com

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