At 109.7 points (down 0.7 points), the Ifo index is still way above its long-term average and on a level that has never been reached before the launch of EMU. The significant decline in Ifo expectations was driven by the manufacturing sector. A decline in oil prices can easily open the door for expectations to improve in Q3.
What can go wrong in the German economy? The biggest short-term risks are on the external side. A sharp increasing oil prices is a risk factor for most economies. A marked slowdown France and Italy or outside Europe (China, US) would quickly translate into weaker sentiment and hard data.
No housing bubble
Finance Minister Schäuble recently expressed concern about a housing bubble building up. However, this angst looks overdone for now. Yes, prices are rising but 1) not very fast on national average, 2) rising employment and net immigration are strong fundamental reasons for higher house prices in larger cities, 3) there is no credit bubble and 4) the typical German financing model continues to be quite conservative.
Going forward, low real and nominal interest rates are clearly supporting the German economy. During comparable stages of the business cycle in the 1990s and early 2000s, the real policy rate amounted to at least two percent (see chart), while it is negative now. We expect GDP growth of around 2%for this year and next, which is above potential growth but not enough to generate strong growth in the Euro area as a whole.
Nordea