Monday, January 30, 2012

Can Germany decouple from Eurozone's "double-dip" recession?

Source: TheLocal
Staying on the topic of sentiment indicators, let's now turn to Europe for a quick look at Germany and the European Commission Economic Sentiment Indicators (ECESI). ECESIs are monthly indicators that use business and consumer surveys to assess the levels of economic "optimism". They combine current conditions as well as expectations (similar to the U Michigan index for US consumers.)
EC: The monthly economic sentiment indicator reflects general economic activity of the EU. This indicator combines assessments and expectations stemming from business and consumer surveys. Such surveys include different components of the economy: industry, consumers, construction and retail trade.
The chart below compares the ECESI Eurozone with the Eurozone year-over-year GDP. ECESI definitely seems to be a good leading indicator for GDP growth.

ECESI Eurozone vs. Eurozone GDP

Now let's look at the ECESI by country.  The index clearly shows Germany decoupling from France and Italy. If ECESI is a decent predictor of the GDP growth as the chart above shows, we should see German economic growth decouple from the bulk of the Eurozone. 

ECESI for Germany, France, and Italy

Another sentiment indicator of German economic optimism is pointing to a similar trend. It is called the ZEW Germany Expectation of Economic Growth (computed by ZEW, a German nonprofit center for European economic research). The chart below shows the index net change. Just as was the case with the U Michigan Consumer Expectations index, ZEW is based on survey of expectations, while current conditions measures may not necessarily indicate economic expansion.  Therefore one should be cautions when interpreting movements in this index.

ZEW Germany Expectation of Economic Growth
Nevertherless the surveys are pointing to a potential for Germany to avoid a "double-dip" recession, which is inevitable for many other Eurozone states.
ZEW: On average the experts estimate a likelihood of 71 per cent that the German GDP will grow during the first quarter 2012. If this comes true, Germany will not slide into a recession for the time being. A recession – speaking in technical terms – does only exist if the quarterly GDP decreases for two consecutive times.
Here are five reasons that may explain some of this economic optimism in Germany.

1. Mild winter has helped German construction industry from shutting down.
2. Similar to US firms, German companies have restructured since 08 and are in a much better position to withstand a Eurozone downturn.
3. Public finances are generally healthy (better than the situation in the US) - for now.
4. German domestic demand continues to be strong.
5. The weak euro is helping the export sector compete more effectively on the international markets.

Clearly risks to German economic expansion are tremendous, particularly if further assistance for periphery nations (via ESM or IMF) or German banks will be required. But if these survey based indicators are reasonable predictors of GDP growth, Germany may indeed achieve at least a partial decoupling.
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