Germany: Confidence in Q1 Recovery Wavers

Consensus Forecasts

German business morale fell last month amid concerns that the latest Euro area debt crisis in Cyprus and political turmoil in Italy will dampen Q1 GDP prospects further. After four consecutive months of improvement, the IFO index slipped from 107.4 in February to 106.7 in March. On the industrial front, production did advance by a modest 0.5% (m-o-m) in February, after a downwardly revised 0.6% contraction in January. However, the outlook for the coming months has dimmed as the PMI for manufacturing dropped below the growth threshold of 50 to a three-month low of 49.0 in March, due largely to external uncertainties constricting business investment. In addition, exports unexpectedly fell by 1.5% (m-o-m) in February after a 1.4% increase in January. The consensus forecast for 2013 industrial production has subsequently been downgraded to 0.1% this month. However, the labour market continued to hold up well as the unemployment rate held steady at 6.9% in March. A resilient job market helped retail sales to climb by 0.4% (m-o-m) in February, although this represented a 2.2% contraction in y-o-y terms, raising concerns over whether domestic demand can support activity this year in the wake of a likely retrenchment in industry. Our panel has left its 2013 forecast for private consumption unchanged this month.

Inflation edged down to 1.4% (y-o-y) in March, its smallest annual increase since December 2010. The ECB elected not to alter monetary policy earlier this month, despite speculation mounting that the downbeat regional growth outlook could prompt a cut in the current refinancing rate of 0.75%. In the long-run, though, lofty wage demands from labour unions could spur consumer prices.

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