German Business Confidence Improves: Will Germany Avoid A Recession ?

In spite of the financial troubles in the Euro Area, German business confidence improved in December. According to the IFO, their measure of business confidence rose from 106.6 (2005=100) in November to 107.2 in December. The measure of current conditions held steady at 116.7 but expectations of activity six months ahead rose from 97.3 in November to 98.4 in December. The IFO measures of the business climate, current conditions and expectations for the economy six months ahead are shown in the first chart.

A week ago, the ZEW measure of confidence among the German financial community also showed a slight improvement in December. There was some reason to question the significance of that improvement as it represented only small decline in the very large percent balance of pessimists--the balance declined to -53.8% from -55.2%. But now with improvement in business confidence perhaps more significance should be attached to the rise in confidence shown by the financial community. In any case, the data are beginning to suggest that the German business communities are looking for a soft landing rather than a recession. The second chart shows the Macroeconomic expectations reported in the IFO and ZEW surveys, together with the recession shading. The pre November and December trends in both series were similar to those just before the 2008 recession, but the upturns in November and December in the IFO and in December in the ZEW suggest a recession is not inevitable.

Three organizations have recently released forecasts for the German Economy in 2012. The Bundesbank and Essen based RWI institute are estimating the economy will increase 0.6% next year and the Kiel based IfW is estimating a 0.5% increase.