Sunday, May 11, 2003

Germany: Surprise, What Surprise?

According to the Financial Times, the slump in Germany's Ifo index was sharp and unexpected. Well if you'd been watching developments in Germany carefully it shouldn't have been (eg Germany's Difficult Road To Reform or Germany: Finally Biting the Bullet? ). The whole point is not that it confounded post-Iraq war expectations, but rather that these expectations were always overly inflated and out of touch with reality (see eg this morning's post ), based as they were on a political and not an economic analysis of the problem. My feeling is that this may mark the begining of some extremely bad data from Germany since, as I have been arguing, whatever the merits or otherwise of the proposed reforms (see links above) the short term consequences will be all negative. Only on an extremely optimistic reading of an extremely questionable version of expectations theory could you read it any other way. And the 'early' ECB rate cut, September perhaps????

A sharp and unexpected slump in Germany's keenly-watched Ifo index highlighted the fragility of Germany's growth prospects on Monday, lending urgency to chancellor Gerhard Schröder's calls for structural reforms to help lift the eurozone's largest economy out of stagnation. The fall in Germany's most important economic indicator, which confounded expectations for a post-Iraq rally, comes amid much uncertainty over Mr Schröder's ability to push through a reform programme that is seen as key to fostering the country's long-term economic revival. The proposed Agenda 2010 measures - including relaxed job protection rules and cuts in jobless benefits - have drawn opposition from a group of rebel left-wingers within the chancellor's own Social Democrat party, who argue the measures risk damaging the weakest elements of society. Mr Schröder on Monday upped pressure on the rebels to fall in line when, in a veiled threat to resign, he warned that a major dilution of the measures he outlined last month would force him to take consequences."

Analysts said the surprise fall in the Ifo index may strengthen the chancellor's hand in arguing for speedy and full implementation of the programme. The Ifo institute's business climate index for western Germany fell from 88.1 in March to 86.6, taking it to its lowest level since December 2001, when the German economy was in recession.The forward-looking component of the index, measuring expectations for the next six months, was especially weak, falling to 94.9 from 97.2 the previous month, heralding little improvement in coming months."There are still no signs of better days for German business sentiment," Hans-Werner Sinn, president of the Munich-based institute said. Contrary to analysts' expectations, the fall of Baghdad on April 9 had had little impact on Ifo's monthly survey of 7,000 companies.The fall in the index, also regarded as a barometer for eurozone growth, follows downbeat Italian and Belgian sentiment indicators last week, and boosts analysts' belief the ECB will act to cut borrowing costs soon.
Source: Financial Times

No comments: