The sharp dip in Germany’s IFO index marks another nail in the coffin for stronger recovery this year. Germany’s economic fortunes are seeing a dramatic reversal of fortunes. The earlier bravado that Germany could stave off the Eurozone debt crisis is taking a tumble. Business confidence is taking a much gloomier view of the outlook ahead, based on the hard landing in the Eurozone and growing signs of slowdown in the global recovery. Based on what we have recently seen from the latest IFO, ZEW and PMI business surveys, Germany will be very lucky to avoid a near term recession in the recent two quarters. The economy is still flirting with recession this year. With so much of Germany’s economy dependent on the success of its export machine, the downturn in global prospects is bound to be reflected in a weaker outlook ahead. The Eurozone debt crisis is the main millstone around the German economy’s neck. While the economic picture continues to fester in the Eurozone, German growth will remain in the doldrums.
There seems little way out of the dilemma. Even while German unemployment is trending lower, German consumers always remain chronically unable to take up the slack. Weaker business confidence will pull down output and investment intentions in industry. The German government remains committed to a balanced budget. This needs to change. The only way out of the bind right now would be a much more munificent policy response by the ECB and Eurozone governments. The ECB looks like it is gearing up for another rate cut, but a quarter point ease is unlikely to make much difference to economic sentiment at this juncture. The ECB needs to open up its monetary coffers with greater abandon. This means it has to embark on an expansive quantitative easing path like its central bank peers – the US Fed, the BOJ and the BOE. In addition, the Eurozone needs to grow its way out of the debt crisis. Eurozone governments need to enact a u-turn on fiscal austerity in order to get the growth wheels in motion again. We are just starting to see early glimmers of a sea-change in austerity targets easing in France and Spain. We need to see more of this throughout the Eurozone in the next two years.
GERMAN IFO INDEX 104.4 IN APRIL VS REUTERS CONSENSUS FORECAST FOR 106.2 (MAY 106.7)
GERMAN CURRENT CONDITIONS INDEX 107.2 IN APRIL VS REUTERS CONSENSUS FORECAST FOR 109.5
GERMAN EXPECTATIONS INDEX 101.6 IN APRIL VS REUTERS CONSENSUS FORECAST FOR 103.0
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