This German Economic Surge “is for Real”

The Ifo index has hit its highest level since 1991 when the measure of German economic sentiment was first introduced.

However, we are told that it will be hard for the data to beat expectations in such impressive fashion going forward.

The Ifo index rose further from 113.0 to 114.6 and hit its highest level since 1991 after reunification.

Analystys point out that Germany has become a powerful two-engine economy benefitting from strong domestic demand and surging global trade.

“We do not believe in a sentiment bubble but think that the latest round of renewed optimism among companies is for real,” says Dr. Andreas Rees, Chief German Economist at
UniCredit Research.

UniCredit say there are now significant upside risks to their growth forecast of 1.7% for 2017.

A scenario of “2%+” has come within reach.

The Euro responded to the news by extending its recent good run against its foreign currency rivals.

Today’s Ifo and PMIs readings are further evidence of how well positioned German companies are,” says Rees. “The underlying drivers are well-known and we repeatedly pointed them out. In a nutshell, domestic demand has been powering ahead.”

In the last nine months, the Ifo index posted seven monthly rises.

The headline figure hit its highest level since reunification. Just for the record, business sentiment is now higher than in summer 2011 (peak at 113.8) and during the heydays of the US house price bubble in 2006-2007 (peak at 113.4).

All these dates and numbers tell us how strong optimism among German companies currently is.

Of course, such elevated levels may also raise concerns among skeptics and naysayers. How reliable is the Ifo index and also the PMIs?

Is it just a sentiment bubble with hard data not following suit in the next few months?

“Our answer is straightforward: NO bubble but upside risks to our and the consensus’ growth forecasts!” says Rees.

But repeatedly strong increases in the next few months towards levels seen before reunification (i.e. sentiment among companies in Western Germany) are unlikely in UniCredit’s view.

“The pre-reunification period was a very special constellation and is certainly not comparable to the current set of fundamentals. Hence, easing business sentiment in the next few months would not be the end of the world but just a “normal” process after such historically elevated levels,” says Rees.