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Economy in Brief

Germany's IFO Improves
by Robert Brusca  November 24, 2015

Germany's IFO Index advanced in November, with its all-sector index rising to 10.9 from 9.4 in October. The all-sector index sits in the 81st percentile of the measure's historic queue of data a relatively strong standing. Current conditions improved to 15.6 from 14.2 to and to a 78th percentile standing. Expectations also improved in November, rising to 6.3 from 4.7 and marking a 77 percentile standing. The IFO standings are on the firm-to-strong side in November.

These standings are both impressive and surprising. Markit's flash PMI readings for Germany show a similar 65th percentile standing for manufacturing but coupled with a 79th percentile reading for services. In the IFO framework the service sector seems to be doing much better than that with wholesaling at the 90th percentile and retailing at the 90th percentile.

Still, the surprise comes from the Germany economy's ability to disregard the difficulties in the pipeline. Even before the Paris attacks and the weekend shuttering of Brussels there has been a migrant problem brewing and Germany has been very divided about how to handle it. Of course, those concerns are now going to get worse. In addition there is the Volkswagen environmental scandal. German tax authorities just today announced a probe of VW related to these issues.

With VW as the largest company by far in Germany and with a very heavy slate of fines likely hanging over its head, there have been precious few repercussions in Germany about VW's fate or its potential to adversely impact the German economy. Are Germans stoic or in denial?

Germany is running out of rabbits to pull out of its hat. When global trade began slowing in this cycle Germany was unaffected because it was selling luxury cars to China. But China has slowed and conspicuous consumption has a come under scrutiny as crack downs against corruption have spread and gained momentum. It is impossible that Germany will be able to keep up its luxury car sales in China. Just today high-end U.S. jeweler-retailer Tiffany reported a drop in quarterly sales blaming the strong dollar for keeping tourists away from the United States and also reporting weaker sales in other markets.

In this economy the low-end and middle segments of retailing seem to fail repeatedly to get into gear and now the high end is running into sales troubles. Germany will suffer from these trends

Overnight a chilling geopolitical development saw NATO member Turkey shoot down a Russian war plane. Turkey said the jet had violated its air space. Turkey and Russia have been having this airspace argument for some time now. But the shoot down by Turkey is the first Russian plane downing by a NATO member since the 1950s. Russia claims there was no air-space violation and that it can prove it. The Russians have called the incident very serious. There are reports that the jet's occupants parachuted free of the plane but there is no word of their safety.

These events mark our world. And so far the German economy and its confidence are unfazed by any of these 'noneconomic' developments. Yet there are forces in the pipeline that are sure to damage the German economy even if the Germans want to pretend that it isn't so. What this survey by the IFO tells us is that there is not yet any impact from these events that are nonetheless in train - not that there will be no impact. There is still plenty of reason to be wary about the future for German growth.

Germany has already been stung once by sanctions imposed on trade with Russia. If this new incident of a plane being shot down by NATO member Turkey elicits a response from Russia we could see Russian activity in the Baltic area heat up. Russia has not been one for the compartmentalization of its responses. Germany, a NATO member, could find itself in a more stirred up environment. Russia already has stepped up its aerial presence in the Baltic region and, in response, NATO planes have been flying a stepped up number of flights there. More intense geopolitical heat is simply another distraction to take policymakers' attention away from formulating a better growth strategy.

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