Has Germany Dodged The Bullet?

The sector array of up-minus-down diffusion readings shows only one negative sector for Germany in April. And this is with a new crisis swirling around the Euro Area.

The far right column arrays the readings in the table Vs their historic results. The expectations reading is above its midpoint standing in the 66th percentile of its range (higher than this only one-third of the time). So that is not a bad reading at all. But it is not as strong as the current reading which is positioned in the 93rd percentile of its queue (higher only 7% of the time) and the climate index that stands in the 88th percentile of this queue.

Despite peeling back into negative territory the construction index is still the relative strongest index this month followed closely by retailing, wholesaling, services, with manufacturing last.

Typically in a recovery period when the manufacturing sector begins to weaken from its cycle peak retailing does not stay strong, but that unusual development is still in train in this cycle as retailing has remained elevated. So we are not really sure how to think of the current German economy because it is doing something different from what it usually does. It could be that manufacturing weakness is temporary and Germany will weather the storm around it allowing the retail sector to remain vibrant. The manufacturing sector which led the way higher in this expansion after the financial crisis has since fallen off and now has a mini revival in place and we can't yet tell if it will continue that revival and underpin retailing or if the Zone's problems will drag German back into the abyss.

This result is not predetermined. Troubles of the Euro Area are still with us. I think the Euro Area troubles are too severe to fix but that belief, unfortunately, does not make the next step very clear. Until we can figure out how Europe will resolve its differences it is hard to tell how the various economies will react.

For now Germany is still strapped into the Euro Area and that gives it a special competitiveness position but of course it is selling its highly competitive products into a very weak market. Germany is still at risk as a nation as the Bundesbank owns up to a large portion of the liabilities of the ECB and it is unclear how that will play out. But any ECB schemes such as LTRO that weaken the ECB balance sheet have negative repercussions for Germany and there is sure to be more of a backlash over this as conditions in the Zone worsen, as they must.

The IFO serves to paint a generally stronger picture of Germany than the PMI readings for MFG and Services from Markit. In that scheme, where we have data through March, German MFG and Services sectors are shrinking.

There is no clarity about growth for the moment. The zone is under pressure. This weekend the French elections will settle things and it is potentially a huge election for the Zone. For now there is little reason for optimism on Zone affairs. Germany has the best chance of emerging from this euro-morass in the least bad shape of all. And that is all the more positive I am willing to be. Trying to say how the Euro Area will turn out is like trying to say who will be the 4rd round draft pick of Dallas Cowboys in the upcoming NFL draft. There are too many moving parts and changing elements ahead of that pick to make such a guess worthwhile. The same is true of developments in the Euro Area.

Summary of IFO Sector Diffusion Readings: CLIMATE Climate Curr Last Mo Since June 1991* Standings   Apr
12 Mar
12 Avg Median Max Min Range %
Range Q or
Rank All Sectors 12.1 12.0 -5.5 -6.8 22.2 -36.6 58.8 82.8% 88.7% MFG 15.4 14.0 2.3 5.1 29.9 -43.7 73.6 80.3% 75.8% Construction -3.8 2.2 -28.5 -29.1 3.4 -49.1 52.5 86.3% 97.4% Wholesale 12.7 12.8 -10.2 -13.4 27.0 -39.0 66.0 78.3% 88.3% Retail 10.8 10.7 -15.2 -16.0 23.6 -41.7 65.3 80.4% 96.1% Services 22.4 22.4 10.4 9.9 33.0 -15.7 48.7 78.2% 85.2% Current conditions:All 22.9 22.7 -5.5 -8.6 33.7 -38.9 72.6 85.1% 93.3% Expectations:All 1.8 1.8 -2.6 -1.1 17.6 -45.3 62.9 74.9% 66.3% * June 2001 for Services