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German Ifo bows under sovereign debt crisis


The sovereign debt crisis continues to rage in German business premises with the Ifo taking the biggest monthly loss since November 2008. German business confidence dropped to 108.7 in August, from 112.9 in July. While the headline index remains still far above its historical average, the drop in the expectation component to 100.1 from 105.0 in July is more worrying.

Recent financial market turmoil and the never-ending Eurozone sovereign debt crisis have befogged the outlook for the German economy. Could history repeat and could a German boom end before it really gets going, as it happened in the early 1990s and 2007/2008? Admittedly, the risks for the German economy have increased lately and today’s drop in the Ifo expectation component is a serious warning. However, for the time being, economic fundamentals look still too sound to fear a fall into recession. The strong labour market with strengthening domestic demand and the high level of backlog orders have become a kind of recession insurance. At least for a couple of months.

 

Of course, the German economy would not be immune against a global recession and a series of major trading partners dropping out of the export engine. However, up to now, such a scenario is not playing out. In our view, the favourable export mix, both in terms of product specialization and destinations, combined with a more balanced economy should return the German economy on a comfortable growth path once the current fog of uncertainty has lifted.

Source: ING BANK