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Economy in Brief

IFO Spurts: Is Germany Leaving EMU Behind? Or just kicking its behind?
by Robert Brusca  February 25, 2013

The German IFO index has jumped sharply in February. From a diffusion value level of 1.3 in January the sector index has jumped to 7.3 in February. The overall Climate index, plotted in the chart, has made its third the strongest gains since 1991. The overall expectations index has made its fifth largest gain over the same period (see graph).

These month-to-month increases are extremely large. They have resulted in boosting the standing of the indexes to much higher levels in their respective ranges. In February the all-sector index stands in the 80th percentile of its range compared to last month when the standing was in the mid-60s percentile. The net reading of 1.3 last month for the all-sector index was higher about 34% of the time in January; however, in February, at a reading of 7.3 the index has been higher less than 20% of the time.

In keeping with the sharp increases in the various overall indices the sector indices show a great deal of strength as well. Manufacturing improved on an increase to a net reading of 9.5 from 2.8 in January. The construction sector posted a 6.9 reading in February compared to -0.2 in January. Wholesaling is at +6.3 compared to -1.4 in January. The German service sector improved in February to a +19 reading from a +15.4 in January.

Retailing continues weak at a -1.2 reading in both February and in January. The retailing reading reminds us that while a number of commenters speak of Germany is The Locomotive of Europe Germany's locomotive is one that has no cars hooked up to it. The speed of Germany's locomotive increases the average speed of the various euro-locomotives. But the increased speed in Germany does not help to increase the speed of the locomotives anyplace else, it may actually slow them. The train analogy really doesn't work for Germany. Germany's economy powers ahead and leaves everybody else in Europe standing at the same crossing while it speeds by with its faster growth.

The highest relative standing among the sectors for Germany is the construction sector which is in the 99th percentile of its range back to the 1990s. Retailing had a -1.2 net reading but that is still relatively strong, standing in the 82nd percentile of its long-term range, placing it above the standing for manufacturing and for wholesaling. That by itself is telling about where German priorities lie. The services sector is in the 71st percentile of its range. The manufacturing is actually the weak sector as it stands approximately the 60th percentile of its range.

The chart shows us that the expectations index, the current index, and the climate index are all moving up sharply. Among these, the current index is moving up the most slowly. As with other surveys much of the improvement in Germany has to do with expectations. While Germany continues to have among the best PMI ratings for its manufacturing and service sectors among its fellow EMU members, its PMI readings also backtracked in their preliminary performance for February.

The European Commission continues to look for contraction across the Eurozone in 2013. And while the ECB has had some optimism about the degree of early repayments of its LTRO loans, today we are finding out that the expectations for early payment are being cut rather sharply.

In terms of overall European optimism, conditions continue to ebb and flow. In terms of having made any significant alterations to the flawed mechanism that governs the operations within the European Community, very little has been done. Mostly what has been done is that the ECB has declared that it is going to stand behind countries and that it is going to be the glue to keep things together should things begin to fall apart. And that is quite different from a true fix that actually supports the structure so that it won't create cracks and so that it won't start to fall apart. The better performance of Germany among Eurozone economies and the fact that German improvement does not cause improvement to spread across the zone is also an old story, circa 2012.

In Italy's former leader Silvio Berlusconi, despite his political baggage, is making a strong run in the upcoming Italian elections largely by blaming Germany for a number of Italy's problems and rebuking Mario Monti for his failure to understand the Italian economy, calling him 'the little professor.'

Spain posted an enlarged deficit for last year. Its debt-to-GDP ratio is rising. Moreover because some of its austerity programs are set to come off of the books; prospects are for further enlargement in its debt and deficit relative to GDP.

France is struggling. Its PMI indices weakened quite sharply in February. As one of the very largest and usually better-behaved of the European Union members, the divergence of its performance from Germany's performance could create further problems for the Eurozone. The German-French rapprochement that occurred between Merkel and Sarkozy despite their personal differences is running into trouble.

On balance the stellar performance of Germany's IFO index raises more questions about Europe. The fact that so much of the improvement is in expectations should also cause us to be somewhat circumspect about whether Germany will fulfill these expectations. It is clear that the problems in southern Europe from Spain and Italy to Greece continue. These problems have spread to France where Prime Minister Hollande has had difficulty delivering his campaign promises. Angela Merkel seems to be in a much stronger position in Germany but she also appears to be increasingly a divisive figure outside of Germany. The UK continues to publically wonder where it belongs as it has fought to reduce the European bureaucracy and bridles against the continental longing for a financial transactions tax that could severely damage London. If anyone thinks that this seems like a great deal of progress and change compared to 2012, I must offer the counter point: I certainly don't see it.

Summary of IFO Sector Diffusion Readings: CLIMATE
CLIMATE Current Last Mo Since June 1991* Queue or
Avg Med Max Min Range %Range Rank
All Sectors 7.3 1.3 -4.3 -4.8 21.9 -36.7 58.6 75.1% 80.5%
  MFG 9.5 2.8 3.7 6.1 30.0 -43.9 73.9 72.3% 60.6%
  Construction 6.9 -0.2 -27.8 -29.0 6.9 -49.0 55.9 100.0% 99.6%
  Wholesale 6.3 -1.4 -8.7 -12.5 26.5 -36.5 63.0 67.9% 80.5%
  Retail -1.2 -1.2 -14.8 -15.7 23.6 -41.3 64.9 61.8% 82.7%
  Retail -1.2 -1.2 -14.8 -15.7 23.6 -41.3 64.9 61.8% 82.7%
  Services 19.0 15.4 10.9 10.5 33.0 -15.7 48.7 71.3% 71.0%
Current conditions:
9.1 5.0 -7.1 -9.2 33.7 -40.5 74.2 66.8% 77.5%
5.5 -2.3 -3.5 -2.1 17.6 -45.2 62.8 80.7% 78.2%
* June 2001 for Services
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