Business expectations fell more than expected, again driven by the manufacturing sector. Construction still looks good, and the retail climate was fairly stable, too.
Ifo number are not part of GDP. We still consider slow growth more likely than stagnation in Q3 and Q4 but doubts are increasing. And right now, it is hard to see where a turn-around could come from. Certainly not from more growth in France and Italy. And not from the ECB either, that is increasingly pushing on a string. German companies don’t lack credit, they lack orders.
With the world economy unlikely to pick up strongly, domestic demand is key. Right now, there is an intensive debate about a lack of public investment in Germany – users of German motorways know the issue. The balanced budget-mantra, however, is likely to remain stronger than those voices arguing for investing much more in bridges, schools, etc. The government is also under increasing pressure from business lobbyists to do more to improve conditions for private companies’ capital spending and not to focus primarily on social issues. A weakening business sentiment could well move the government towards incentives for capital spending. This could support the economy in the medium term, but not quickly. The Ifo index has probably not bottomed out.
Nordea