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German Business Confidence Recovers, EMU Econmic Growth Erratic

Posted by Joseph Trevisani on Nov 24, 2014 9:34:00 AM

The outlook of Germany's business executives unexpectedly revived after six straight months of decline encouraged by the return of economic growth and the European Central Bank's new focus on stimulus.

The Ifo Institute's business climate index rose to 104.7 in November from 103.2 in October for the first gain since April.  Analysts in the Bloomberg survey had predicted a slight drop to 103.0.

Germany's economy had contracted 0.1 percent in the second quarter eliciting fears that Europe’s largest and most essential economy was slipping into recession. Those fears were quieted somewhat  ten days ago when third quarter GDP was reported expanding 0.1 percent on the quarter.

Ifo’s report on current conditions climbed to 110 this month from 108.4 in October, and the measure of expectations advanced to 99.7 from 98.3. 

The German economy has one suffered just one recession, defined as two consecutive quarters of negative GDP, associated with the financial crisis and its aftermath. Of the other largest EMU economies ranked by size, France has had two recessions and Italy and Spain three. Italy is currently in recession. 

Because German is the EMU's largest economy its performance is crucial to the overall economic performance of the currency bloc. But as Germany largest trading partners are the other members of the EMU, the low level of economic activity in many of the other 17 members of the currency union has been a drag in turn on the German economy. If for example France and Italy and Spain do not buy as many Mercedes and BMWs as normal, it is difficult for the companies to replaces those sales elsewhere.

The difficulties of the German economy to find steady growth are emblematic of the euro zone as a whole which has suffered erratic and low growth and two recessions since the financial crisis. TheEMU's second recession lasted a year and a half and only ended in the second quarter of 2013. In the six quarters since then the EMU economy has averaged just 0.2 percent growth each quarter. 

ECB President Mario Draghi said last week that the central bank will add further stimulus to the region if needed to encourage inflation, which at 0.3 percent annually in October was far below the bank's 2 percent target, and to boost econmic growth.

Since June, the Frankfurt-based ECB has cut interest rates, proffered long-term loans to banks, though with minimal take-up and bought covered bonds and asset-backed securities.  

Market speculation that the bank's next move will be to purchase the sovereign debt of EMU members, has driven rates on German, French and other national bonds to historic lows. 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

ifo nov 24

emu gdp nov 24

germany gdp nov 24


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