German defies surging oil prices and interest rates
The desk views the recovery in the German economy as a significant factor driving market sentiment, despite challenges such as rising oil prices and interest rates. Recent data from the Ifo index indicates a notable rebound, marking five consecutive months of improvement to 89.9 in September, suggesting that fiscal stimulus is supporting economic resilience. Per the full note , this newfound strength positions Germany for potentially robust growth, reflecting a resilience that could impact EUR dynamics positively against USD. While the overall outlook remains cautiously optimistic, external risks persist.
What the desk is arguing
The desk interprets the recent surge in the Ifo index as signaling a cyclical rebound in the German economy, despite pressures from surging energy prices and interest rates. This positive sentiment comes after five consecutive months of improvement, where the index rose to 89.9, the highest in over a year, suggesting that fiscal measures are having a tangible effect on economic activity. Yet, while encouraging, this is not a replacement for structural recovery; rather, it indicates an economy gaining traction in a challenging environment.
The strong performance in the first half of the year creates a foundation for growth, as evidenced by improved assessments within the Ifo index components. A notable part of this recovery has been attributed to governmental measures, such as the tax rebate on fuel, which helped maintain private consumption levels despite external shocks. Hence, the desk sees German economic sentiment as unexpectedly buoyant, driven by factors that may not yet be fully appreciated by the market, such as a self-sustaining economic activity bolstered by fiscal stimulus.
Where it sits in our coverage
Currently, our consensus target for the EUR/USD stands at 1.075 with an achievable range between 1.04 to 1.12, as tracked by notable firms. Specific targets include: - jpmorgan: 1.10, Mar26 - bofa: 1.04, Mar26
This view from the desk aligns closely with jpmorgan's target, suggesting a bullish stance towards the euro amidst positive sentiment. However, it sits at the upper bound of the consensus, underscoring a divergence from bofa, which maintains a more cautious outlook.
How other firms see it
Among aligned firms, there is general agreement on the potential for German economic resilience factoring into euro strength. Conversely, some firms, including the bearish bofa, express skepticism about the sustainability of this rebound.
It's important to monitor key indicators such as the EUR/USD trajectory, which may be influenced by ongoing developments in the German economy and adjustments from the European Central Bank regarding interest rates and economic outlooks.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Ifo index rises for the fifth consecutive month to 89.9, indicating cyclical recovery.
- 02German economy shows resilience against rising oil prices and interest hikes.
- 03Fiscal stimulus appears to be reaching the real economy, encouraging self-sustained growth.
- 04Outlook remains cautious amid external risks, including supply chain disruptions.
Market implications
Traders should watch for potential upward movement in EUR/USD as market sentiment adjusts to Germany's economic resilience, particularly around the 1.075 level. This close tracking of the Ifo index will likely shape positioning strategies in the upcoming trading sessions.
Risks to this view
A reversal of the bullish thesis could occur if external economic pressures intensify, particularly through escalating energy prices or a downturn in global market sentiment. Additionally, any indications that fiscal measures are insufficient to sustain growth may prompt a reassessment of the euro's strength.
Older quick take Quick take Published 09:28 Germany German defies surging oil prices and interest rates It's almost too good to be true. The fifth consecutive increase in the Ifo index suggests that the German economy has staged a cyclical rebound. Of course, this is not the same as a structural recovery – but it's a start There are still downside risks to Germany's short-term outlook, but the strong first half of the year alone has prepared the economy for its best growth performance since 2022 Almost secretly, the German economy has developed unexpected resilience, with its leading indicator, the Ifo index, now up for the fifth consecutive month.
In September, the Ifo index stood at 89.9, up from 88.8 in August, and is now at its highest level in more than a year. And you actually start wondering, “why?” To make things even better, both the current assessment and the expectations component improved significantly. Surging energy prices and interest rates?
Supply chain disruptions due to low water levels in Europe and the closure of the Strait of Hormuz? It seems German sentiment has become immune, or numb, to the long list of potential downside risks. But why is it that this measure has been improving for five months in a row?
The honest answer would probably be that we simply don’t know. The more analytical answer is that fiscal stimulus is finally reaching the real economy and that economic activity has become more self-sustained than often feared. On track for the best growth performance since 2022 The German economy may have weathered the first half of the year better than expected, but past performance is no guarantee of future success.
To some extent, the resilience in the second quarter was also driven by the fact that other regions were hit harder by the closure of the Strait of Hormuz, making some German companies a kind of crisis beneficiary. The German government’s tax rebate on fuel also prevented private consumption from falling off a cliff, a factor that will have played no role in the third quarter but is returning as of 1 October. Looking ahead, there are clear risks posed to the German outlook: the war in the Middle East, which it seems could be slowly turning into a forever war, oil prices remaining at elevated levels, as well as the likely upcoming shock of higher gas prices in the next heating season and renewed trade tensions.
And there's more. Even if rain over the last few days in Germany has brought limited relief, the low water in the main transportation waterways is another threat to industrial supply chains and production. At the same time, though, order books have started to recover in recent months, pointing to some positive momentum in industry.
And the billions of euros from the government’s fiscal stimulus on defence and infrastructure have started to trickle down into the economy. While there are still clear downside risks to the short-term outlook, the strong first half of the year alone has prepared the economy for its best growth performance since 2022. We currently expect GDP growth of around 1% this year.
Political uncertainty remains The biggest unknown for the German outlook, particularly the longer-term outlook, remains whether the government is still willing and able to implement the already announced structural reforms. And to go beyond that. So far, the announced reforms – as disruptive as they might feel to some – are mainly aimed at making public finances more sustainable in light of an ageing population.
They do very little to improve the country’s economic competitiveness. To structurally improve Germany’s international competitiveness, the government would have to be much bolder. Think of a substantial reduction of bureaucracy, regulation and taxes.
Or a long-term strategy for affordable energy, better education and more innovation. And much more. Against the political background of the three regional state elections of recent weeks, however, the federal government once again looks fragile.
In a political landscape increasingly characterised by a strengthening of the extreme edges and a pulverised centre, agreeing on a longer-term strategy and actually pushing it through has become a virtually indispensable challenge. All in all, despite the long list of potential downside risks, the German economy is enjoying unexpected resilience and even a small cyclical rebound. However, at the risk of being your favourite party spoiler, a cyclical rebound does not automatically make for a structural recovery and does not offset the urgent need for structural change.
But it's a start. IFO index Germany GDP Eurozone Content Disclaimer This publication has been prepared by ING solely for information purposes irrespective of a particular user's means, financial situation or investment objectives. The information does not constitute investment recommendation, and nor is it investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument.
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