Some mixed messages from German Ifo data, the headline softening - to 105.3 - for the second consecutive month, although the interesting aspect was the divergence between respondents’ view of the current situation (rising) and their expectations of the future (falling). So, expectations are now flirting with a three-year low. Judging by the recent relationship between the Ifo and German GDP growth, the current level is indicative of growth around the 1% level. Of course, at a time when the eurozone periphery is in recession and there are renewed doubts about the US recovery, this is not encouraging news.
But the point about Germany is that it’s not primarily about growth. From 1999 to date, Germany’s growth performance has been only slightly better than Italy’s, Germany growing an annual average of 1.4% vs. Italy’s 1.1%. Indeed, during the early part of EMU Germany was often referred to as the sick man of Europe. Germany’s fortunes were transformed by extensive labour market-reforms nearly ten years ago, together with retention of a competitive position with regards to labour costs (in contrast to much of the periphery). Germany’s domestic demand averaged just 0.2% over this period, not that far above Italy’s 0.15% average. But their fortunes currently could not look more different. This more than anything highlights that many of the current troubles beyond Germany’s borders are down to structural issues and balance sheets, not growth.