Germany: Ending The Year On A Positive Note

Another increase in the Ifo index suggests that the worst for the German economy should be over. However, what will come after the 'worst' still remains unclear.

Germany’s most prominent leading indicator, the Ifo index, just added more evidence to a tentative bottoming out of the German economy. The Ifo index increased for the fourth month in a row to 96.3 in December, from 95.1 in November. In December, both the current assessment and expectations component increased. However, before anyone gets too cheerful, just want to remind you all that the headline number is still not back where it was in June, earlier this year. 

This positive Ifo reading brings a conciliatory end to the economic year 2019. It ends the year on a positive note and with the hope for a rebound in 2020. However, as much as we would like to see the German economy leaving the stagnation territory behind, truth is that any tangible bottoming out is still hard to find. In fact, hard data disappointed in October and particularly the manufacturing sector remains in the doldrums. Inventories are still increasing and order books are still thinning out. A combination which does not bode well for industrial production in the near future. Still, a rebound of global activity on the back of a phase-one trade deal between the US and China would clearly benefit the German economy in 2020 and could make hard economic data eventually catch up with optimistic soft indicators.

With today’s Ifo index, a turbulent year for the German economy draws to a close. A year, in which the economy has been flirting with stagnation and technical recession. A year, in which strong private and public consumption has offset the impact from the manufacturing slump.

Looking ahead, the widening gap between a weak manufacturing sector and solid consumption as well as a strong labor market looks hard to sustain. Something has to give.

Either the domestic protection against trade conflicts and global manufacturing weakness crumbles further or a bottoming out, followed by a meagre rebound, in the manufacturing sector will come just in time to push the economy to somewhat higher growth rates.

Today’s Ifo index provides hope that the latter, more optimistic, scenario will materialize. In any case, even a cyclical rebound does not wash away the structural challenges for the German economy and the need for more investments. Something to think about during the reflective Christmas period.