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By HaleStewart August 27, 2014 8:11 am
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This Week's News From Germany Is Not Encouraging

Germany has been the primary driver of EU growth over the last few years.  Over the last few months, news from Italy and France has, at best, been neutral, adding more pressure on Germany.  Unfortunately, this week's German news has only raised the level of concern about its ability to lead the EU's economic growth. 

The IFO business sentiment number continues to move lower:

The Ifo Business Climate Index for industry and trade in Germany fell in August to 106.3 points from 108.0 in the previous month. The firms were again less satisfied with their current business situation. Also with regard to the further course of business, they are more sceptical than in the previous month. The German economy continues to lose steam.

All three components -- current conditions, expectations and overall assessment of the business situation -- are moving lower.  Obviously, the international situation is playing into this; the FT reported that Russian sanctions are starting to hurt Germany and the overall Ukraine situation is obviously depressive.  But also consider that the EU economy is flirting with deflation; unemployment is high and, in general, the region's news has been at best neutral if not negative for the last quarter. 

The IFO reading is nearing the point where it is representative of a downswing:

And today it was announced that consumer confidence has dropped further:

Consumers are increasingly taking the intensified geopolitical situation into consideration in their assessment of how the German economy will develop over the coming months. The indicator dropped by 35.5 points, plummeting to 10.4 points. A decline of this magnitude in just one month has not been recorded since the survey began in 1980. Consequently, virtually all improvement in the economic expectations indicator over the past year has been negated in one fell swoop. In August 2013, the indicator value was 1.8 points.

This latest drop is severe; one monthly reading has wiped out an entire year's worth of improvement:

Consider this data in light of the already weak condition of Germany's overall retail sales:

Germany is now sending very concerning signals about the next 3-6 months of economic growth.  And that means the EU's potential problems are increasing.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

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