German confidence hit by euro rescue efforts

Concerns are growing that the debt crisis across the eurozone is weighing on the German economy following the release of the country’s leading confidence indicator, which shows a downward trend for the fifth month.

The German IFO Index fell to 101.4 in September, down from 102.3 in August. It is at its lowest since Feb 2010, when the eurozone crisis was at its height.

More worryingly, the expectation index, which reflects entrepreneurs’ view of where the economy is heading, was down at 93.2, firmly in recessionary territory.

The only upside in yesterday’s Ifo report is that the current assessment element is relatively high at 110.3.

“The Ifo index shows that German companies remain sceptical about the economic impact of [ECB president] Mario Draghi’s magic,” said Carsten Brzeski, Brussels-based economist with ING Bank.

“Despite fears of a eurozone break-up fading, German businesses are downscaling their expectations. It looks as if German businesses realise that keeping the eurozone alive alone will not return growth quickly. The structural adjustments in Germany’s eurozone trading partners will take time and will dampen demand for German products.”

The German economy faces three challenges, said Mr Brzeski: the global slowdown, which will weaken demand for German exports; the deteriorating state of the German labour market, which will weigh on domestic demand; and “perverse, euro rescue factor”.

The German economy had benefited from a low currency exchange rate and a low interest rate environment when the debt crisis was sweeping the region. But the latest proposals initiated by the ECB to save the single currency have seen an appreciation of the euro, which is hampering export growth.

“In the short run, a stronger euro and somewhat higher interest rates should dampen German growth but, in the long-run, the positive impact from a stabilised eurozone should prevail,” said Mr Brzeski.

“Ifo confirms our view that the German economy could see a contraction in the third quarter. Up to now, the real economy held up rather well, despite gradually deteriorating confidence indicators. Even the third quarter started on a very positive note. While industrial production and new orders rebounded in July, only retail sales were down, illustrating the relative robustness of the economy. However, it is doubtful the decoupling between hard and soft indicators can last long.”