Philadelphia, Pennsylvania – (StockNewsDesk) – 09/24/2014 — German business sentiment, IFO, fell to 104.7, the fifth straight monthly decline, falling to its lowest level since its recovery from the 2012 lows.
German Economy Trembling
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The sentiment survey is based on a reading from 7,000 firms, and it gives a composite picture of the German economy. It is used by policymakers and market participants, and it shapes general expectations. The September survey was unanimous in weakening across the board. After the second quarter negative growth, there was hope that this figure was a blip rather than a trend.
This survey shows that business sentiment remains depressed with spending, hiring, and capital expenses all continuing to trend lower. The third and fourth quarter growth downgraded based on the survey results. Some of the reasons for the weakness are confusion related to the Ukraine crisis and the weakening European economy.
The Ukraine crisis has been tough for Germany because of its close economic ties with Russia. Russia’s aggressive incursion into Ukraine has forced German Premier Angela Merkel and US President Obama to place harsh economic sanctions against Russia as penalties for violating Ukraine’s sovereignty.
Over 6,000 German companies do business in Russia, and many of their activities have been forced to stop. Furthermore, Russia is a huge export market for Germany with around 10% of its exports going there. These have also been significantly reduced. Germany is also reliant on Russia for natural gas and, as the winter comes, there is concern about the happenings and the costs. Given these political uncertainties with an intractable foe like Putin, the depressed business sentiment makes sense.
Weak European Economies
Europe’s economy has muddled through, constantly teetering on the edge of another crisis. In recent months, one of the stalwarts, Germany, has begun to weaken also, killing any hopes for a rebound by the end of the year. In contrast to Germany, periphery countries, such as Portugal, Greece, Ireland, Italy, and Spain, have been notoriously weak, grappling with budgetary issues and unemployment levels in the twenties.
Germany has managed to uphold an impressive growth rate despite the lingering problems in the European Union. While the EU’s growth rate remained under 1%, Germany was growing at 3%. Its stock market and borrowing costs also reflected this strength, as the DAX made all-time highs, and borrowing costs were equivalent to the US.
The hope was that strength in Germany would begin to lift the rest of the European economies, and stocks across the board rallied before such a result. This scenario is basically void at this point. Now, it puts more focus on EU policymakers, and whether they will address these issues with some sort of stimulus.
Already, Mario Draghi’s statements about paying attention to forward inflation expectations and interest rate cuts have proven to be ineffective, as inflation expectations continue to fall further. This is a clear sign that the markets do not think this program is large enough to change the trajectory. Draghi and the periphery countries are in favor of a massive QE program, like the US. However, Germany’s more conservative bankers are opposed. German stocks actually rallied on the poor release as it augments chances that more aggressive stimulus will be used.
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