Europe is certainly suffering from a bad case of indigestion this morning after last night’s six-hour dinner in Brussels. But considering the data that has been swallowed by markets, then perhaps it’s not that surprising. As well as the now traditional weakness in the flash PMI estimates for Germany, France and the eurozone as a whole, the latest survey from the German Ifo institute has recorded a sharp fall from 109.9 to 106.9. This is the sharpest monthly decline since August of last year and we’ve only seen five falls of more than this in the past six years. The survey had been out of kilter with some of the other indicators on the economy, not least the PMIs, so today’s numbers bring it more into line with other evidence and also the actual recent GDP readings.
Despite strength seen in net trade in the further details of German GDP released this morning, the perception that the German economy can somehow remain immune from events in the rest of Europe has been weakened of late. At the same time, Germany is grappling with the creeping effects of very low interest rates (beyond the benefits on the funding front) on its economy, the impact of which is starting to be seen in wage demands and elsewhere. The question is to what degree Germany is prepared to tolerate this in the face of the greater eurozone good? There have been some signs of movement but don’t underestimate the intransigence that pressure from outside Germany to tolerate higher inflation will be met with.