Monday, May 3, 2010
A Projected IT Park In Chennai, India
A promising outlook
The total absence of growth in Euroland in Q4 09 and the simultaneous decline in German industrial production has led many observers to fear that Euroland will not only be the laggard in this recovery, but that Euroland growth could even double-dip. The crisis in Greece, structural imbalances in other countries and a strong euro have further fuelled concerns about the strength of Euroland’s recovery.
However, the forward-looking indicators that we usually pay most attention to in our short-term analysis signal a much more promising outlook. They also signal that growth differences within Euroland will be pronounced in the future. German growth prospects are particularly promising while several peripheral countries are facing low growth and we expect Greece to remain in recession for at least another year.
Germany takes the lead
German manufacturing PMI has increased for 14 consecutive months and jumped to 60.2 in March. This is the highest level since the peak reached in April 2000 and signals a very strong recovery in German industrial production. German manufacturing PMI new orders reached 65.2 in March – an all-time high. New export orders also hit an all-time high.
But can we really trust the upbeat German PMI readings? After all, German industrial production declined in Q4 09 despite manufacturing PMI climbing above 50 in October 2009. Part of the explanation for this is that the German car scrappage scheme ended in early September 2009 and as a result German car production declined and temporarily pulled down industrial production. This sector-specific slump was not fully captured by PMI, which can partly be explained by the fact that the car industry temporarily accounted for an unusually large share of total industrial production due to the car scrappage scheme. As the decline in car production comes to an end, German industrial production is projected to show growth better aligned with the very upbeat PMI reading.
The promising outlook is confirmed by the Ifo expectations index, which has risen for 15 consecutive months and now stands at the highest level since June 2006. Our Ifo model points to even further increases. The Ifo sub-indices for expectations with regard to production activity in the next three months are particularly upbeat. Production activity expectations are very close to being at an all-time high.