Aided by near record-low unemployment and her tough stance defending Germany’s interests during the Euro area crisis, Chancellor Angela Merkel secured a resounding victory in last month’s elections. However, her centre-right party still requires a coalition partner in order to govern. As political discussions progress, latest indicators suggest that the economy is benefiting from the Euro zone’s fledgling recovery. Industrial production rebounded by 1.4% (m-o-m) in August, confirming that earlier weakness stemming from an extended winter has now been overcome. The PMI for manufacturing did edge down slightly to 51.5 in September, even though it remained above the growth threshold of 50 for a third successive month. While the sector likely contributed positively to Q3 activity, our panel’s 2013 production forecast has dropped to 0.0% this month. Meanwhile, GDP prospects received a boost after the IFO business climate index rose to a 17-month high of 107.7 in September, buoyed by an upturn in sentiment for the retail industry. Domestic demand remains bolstered by a solid labour market and above-inflation wage growth. Indeed, retail sales advanced by 0.5% (m-o-m) in August following declines in June and July. While the unemployment rate unexpectedly climbed to 6.9% in September, this uptick was attributed to a shift in labour policies rather than deteriorating fundamentals. However, exports – the cornerstone of German growth – continued to undershoot expectations in August, increasing by just 1.0% (m-o-m) after a surprise fall in July.
Inflation moderated to 1.4% (y-o-y) in September, further supporting consumption and enabling the ECB to continue with its aggressively loose monetary policy.
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