It looks like the bells are starting to toll in Germany that the Eurozone crisis is about to hit recovery prospects again. The drop in the bellwether German IFO business sentiment index shows a new reality that Germany cannot shrug off mounting political and economic problems in the Eurozone for too much longer. The biggest risk right now is that euro contagion is once again un-caged and ready to rip through the heart of economic confidence. The crisis in Cyprus is coming to a head and ready to pounce on recent optimism that the Eurozone and Germany could get back onto a more even keel. That has just been wishful thinking. The political situation is so looking so tenuous that it is bound to hit German confidence very hard in the next few months.
The March IFO index dropped to 106.7 from 107.4 in February, reversing four months of sharp gains. Future expectations marked the worst fall, dropping back to 103.6 in March from 104.6 in the previous month. What was interesting was that IFO pointed out that 85% of the survey responses were taking after news broke over Cyprus, intimating that most of the worst effects were already factored in. To the contrary, perhaps German industry has its head in the sand and ignoring the impending contagion risks. The crisis looks set to escalate with likely collateral damage expected to affect business prospects all across the Eurozone. Germany will not be spared.
Germany might have been showing some recent signs of economic spring, but it will all tend to implode if contagion pressures begin to surface in a bigger way. Even recent domestic lead indicators have shown warning signs that all is not right in the German recovery right now. The recent fall in industrial orders, especially in foreign order books, all underline that there are fractures under the German recovery. There is a risk now that Germany may already be in recession again after the dip in output in the fourth quarter. There will be a dawning reality that Germany is in this together with the rest of the Eurozone and that its economic fortunes are inextricably linked up with the rest of its Eurozone partners – rich and poor. It is a reminder that Germany can ill-afford to turn its back on countries like Cyprus. The Eurozone has to rise or else fall together. This is another reminder to the ECB that they need to keep monetary policy on a very easy setting for a long time.
GERMANY MARCH 13 FEB 13 MARCH 12
BUSINESS CLIMATE 106.7 107.4 109.8
BUSINESS CLIMATE 106.7 107.4 109.8
BUSINESS CONDITIONS 109.9 110.2 117.4
BUSINESS EXPECTATIONS 103.6 104.6 102.7
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