Thursday, January 15, 2015

15/1/2015: Upbeat German Data Might Not Be a Boom Signal for Europe

So German economy expanded 1.5% in 2014 and managed a budget deficit of just 0.4% of GDP. That's the latests numbers and they are beating performance since 2011. Which is good news.

Except for the bad news. Take a look at CES-Ifo data on current economic conditions and forward 6 months expectations.

Chart 1:

Per chart above, euro area assessments of own performance over 2014 were upbeat compared to Germany. The outrun is euro area economy under-performed Germany in the end. And forward:

Chart 2:

Euro area forward expectations remain also upbeat through Q3 2014 on 6 months forward basis. Which turned into downbeat print in Q4. But they remain upbeat through Q1 2015. And taking in the economy print for Germany for 2014, this suggests that euro area will be disappointing on growth over the next 3 months. Thereafter, either Germany will reignite euro area growth (option 1) or continue expanding without much of a response from the euro area (option 2)

What's more likely? Since 2010 through present, 6mo forward expectations in the euro area have been posting much shallower correlation with 6mo forward expectations in Germany (+0.56) than over pre-crisis period (0.66 for 2000-2007 and 0.70 for 1991-2000).  And these are taking Germany into account in euro area data.

Which suggests option 2 is likelier.

So it's Germany 1: Rest of EMU 0.5. Things are more worrying than 1.5% growth 2014 for German economy might imply.

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