German Economic Growth Carrying Europe

The latest set of polls and surveys reinforce the message that has been coming from Europe as a whole for several months: the German economy is confident and growing.

The surveys of business, investors and consumers are all converging to send the same message that the German economy is strong, getting stronger and instrumental in dragging much of the euro zone economy along with it. Just as important is the fact that not every nation is getting a chance to hang on to the German coat tails, which will present some issues in the months ahead. Germany's latest PMI data is coming from a "flash" index based on surveys of about 2,000 businesses. The statistics are not as reliable and complete as the bigger PMI studies released in a week but, thus far, have been pretty solid indicators of what is to come. The latest number is 55.2, and its new business index hit 55.4, a 39-month high for that sub-index. This is also well above last month's level - 53.9. That suggests growth has been consistent and poised for more rapid acceleration in the months to come. That assumes that the European Central Bank (ECB) is not forced to start acting against inflation. Even should that develop, the German economy appears to be better insulated than those in most in Europe partly due to the ongoing ability of its business to diversify their market position.

It is widening the gulf between the Germans and the rest of Europe that worries many. At the same time that confidence in the German economy has reached a 20-year peak, the attitudes in the financially strapped nations have weakened. The new order numbers in Ireland, Portugal, Greece and Spain have fallen to five-month lows, and there is little expectation that conditions will improve before the end of the year or perhaps into 2012. The rate of joblessness has improved in Germany, but the Eurozone as a whole likely will hover around 10% for the bulk of the year. It may even worsen as the various austerity plans start to get serious.

Analysis: The division between the nations that are coming out of the recession and those still mired in the crisis will create some very awkward moments in the near future. Start with the potential moves the ECB will feel compelled to take if inflation becomes the issue they fear. The Germans and the French will demand that the rates be hiked sooner than later despite the potential to cripple the recovery efforts in the worst hit nations. The already strained unity of the European Union will be pushed to the breaking point. The last thing these states want is to see the Euro get stronger at the same time that debt is harder to accumulate. The Germans and other healthier economies will be under even greater pressure to bail these nations out. That will hardly be a popular political decision. Such division fuels those who question the ability of the Euro itself to survive the crisis. At present, the powers that be are saying the right thing about the Euro and the need for euro zone unity. However, the diverging nature of economic growth will put the whole system to the test unless the rise of the German and French economies is enough to haul some of the others out of the abyss.

Source: Armada Corporate Intelligence's Strategic Global Intelligence Brief

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