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Economy in Brief

Germany’s IFO Index Bounces on Improved Expectations
by Robert Brusca  January 24, 2008

Bounce raises the question of EMU-US de-coupling.

Apparently Germans agree… They agree with the ECB that weakness does not threaten Germany or Europe and they see better times ahead as the IFO expectations index that looks six months into the future rose enough to kick the climate index higher. No wonder Axel Weber, Bundesbank president, was saying that markets do not understand the ECB and are too driven by short-term horizons. Weber, in comments today, hinted that the next ECB move could be to tighten, not to ease as markets had expected just yesterday.

These events raise the question of whether markets have de-coupled or whether either Europe’s or the US central bankers are just plain wrong about the outlook. Can Europe be so strong that it may need to tighten if the US is as weak as all the fiscal and monetary stimulus in train seem to expect? Or is Germany and the ECB simply wrong in their outlook? Or is the Fed and Congress wrong and just too wrapped up in the needs of US short-term presidential election year politics?

We can’t tell here and now, but time will tell.

The respondents to the IFO survey did see somewhat weaker current conditions, but not much weaker. At a value of 107.9 the current index is still in the top quartile of its range. It slipped by just 0.2 points in January, less than in December. It is still well above its average value of 95.0. It is lower year/year by 4.2%, less than the 6.2% drop registered on that basis in December.

Business expectations improved by 0.8% in Germany. This propelled the overall climate index up to 103.4 from 103.0 in December. Expectations are still lower by 4.1% Yr/Yr less than the 4.3% drop registered in December. But the IFO survey is hardly a report ringing warning bells in the ears of the ECB.

The overall EU index for Germany had already slowed its rate of descent in December. Now the IFO actually has improved. We seem to have a decoupling in progress if the actions of the ECB and the Fed are each correct. The question is: are they?

IFO Survey: Germany
  Jan-08 Dec-07 Nov-07 Oct-07 Sep-07 Aug-07 Jul-07 Jun-07
Biz Climate -4.2% -5.3% -2.5% -1.4% -1.0% 0.7% 0.8% 0.3%
Current Situation -4.3% -6.2% -3.2% -2.1% -1.3% 2.5% 2.4% 1.6%
Biz Expectations -4.1% -4.3% -2.0% -0.8% -0.4% -1.1% -0.9% -1.3%
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