German economy reaches cruising altitude as business confidence stays high

[FRANKFURT] The German economy, Europe's biggest, appears to have reached cruising altitude as business confidence maintained its current high level in May, the Ifo economic institute said Friday.

The Ifo institute's closely watched business climate index eased slightly to 108.5 points this month from 108.6 points in April, the think tank said in a statement.

It was the first time since September that the index has fallen, but analysts had been expecting a slightly bigger drop.

Hence, Ifo president Hans-Werner Sinn insisted that the development was no cause for concern.

"Companies were once again more satisfied with their current business situation, but expressed slightly less optimism about the months ahead. The German economy remains on track," he said.

Ifo calculates its headline index on the basis of companies' assessments of the current business environment and the outlook for the next six months.

The sub-index measuring current business rose to 114.3 points, the highest level since June 2014, while the outlook sub-index slipped by 0.4 point to 103.0 points, the institute said.

Analysts generally viewed the data as positive.

"Germany has reached cruising altitude," said Berenberg Bank economist Christian Schulz.

"Overall, the Ifo index signals solid growth in the eurozone's largest economy, but also that after the rally in confidence indicators since the autumn 2014, the room for further improvement is now limited," he said.

Some of the tailwinds to recovery - such as cheap oil and the weaker euro - were "blowing a bit less strongly," he said.

That was backed up by a detailed breakdown of first-quarter gross domestic product (GDP) data released earlier by the federal statistics office Destatis.

According to the stats office, economic growth of 0.3 per cent in the first three months of this year was driven overwhelmingly by domestic demand, with foreign trade actually acting as a drag on growth.

But overall, "today's Ifo reading suggests that the German economy is in a fine condition," said Natixis economist Johannes Gareis.

"Looking ahead, we expect the German economy to post solid growth in 2015. The fundamentals are favourable," Mr Gareis said.

"Private consumption is likely to remain the main driver of growth, spurred by a robust labour market, low inflation and ultra-low interest rates. However, the recent economic news flow suggests that the German engine has reached its limits," he cautioned.

Commerzbank economist Joerg Kraemer agreed.

"The expectations component of the Ifo index has now fallen for the second time, which is signalling a reversal to the downside for the Ifo. We continue to see downside risks to our 2015 growth forecast for Germany," he said.

"It is simply a fact that Germany is at the end of a very positive reform-growth cycle, which is artificially extended by external tailwinds," said ING DiBa economist Carsten Brzeski.

"In the short run, the fundamentals are sound enough to see another acceleration of the German economy," he said.

But looking ahead, there were several risks, such as the never-ending Greek crisis, a longer-than-expected period of weakness of the US economy, and the recent round of industrial strikes.

Nevertheless, "all in all, today's data may have not been enough to cheer up real morning grumps. But they were also no reason to stay in bed and get depressed about the German economy. Maybe the economy is just human: it can't deliver peak performances every month or every quarter," Mr Brzeski concluded.

AFP