Germany's mighty industrial engine appears to be on the point of jump-starting back into a life after mis-firing badly at times during the past few quarters. The latest reading of the IFO Index measure of business confidence showed an important uptick since the beginning of the year, with businesses reporting a sustained expansion in confidence - in IFO terms above 100 - for the past eight months. In fact, German business confidence could be about to break out to levels last seen in 2010. But whether that surge in confidence will be sustained by subsequent performance leads investors on to a more nuanced debate.
The main reason for the upturn in confidence is the tangible evidence that Germany's core export markets are starting to move out of recession, with the country reporting brighter than expected second-quarter GDP growth of 0.7 per cent after three quarters of relative decline. Interestingly, in spite of German manufacturers' huge presence in emerging markets, a more buoyant US and, in parts, eurozone economy is generating the biggest boost in confidence among its exporters. Germany exports two-thirds of its industrial output to developed economies.
The overall confidence picture within Germany is more nuanced. For example, retail and construction, although both above their long-term averages, are experiencing lower levels of confidence, according to IFO, which could herald a return to a situation where a heightened savings rate reverses the trend towards higher domestic consumption that the economy had started to experience.
