EM's poor growth preformance may hit German economy

The Ifo business climate for German trade and industry has surprised economists (consensus: 107.9) and in fact risen marginally this month from the high level of 108.4 to 108.5. However, it would be premature to celebrate, as the result is due solely to improved sentiment in construction and trade, which is highly volatile. The business climate in the core sector of the German economy, manufacturing, has actually fallen this month. Manufacturing has been shrinking since June. 

In other words, the economic weakness in China and other emerging markets has already hit German industry. Moreover, China's growth is set to continue slowing down for quite some time yet, as there is a glut of unsold real estate, and the corporate sector and private households have high debt levels of 190% of GDP. All these negative factors will be too much for German domestic demand to absorb in the long run. Private consumption is already set to rise by 2% in real terms this year and the potential for even stronger increases is limited.

At the moment, the German economy is still reaping the benefit of the reforms introduced during the Schröder era and the boost given by past euro weakness. 

"We are confident about our forecast of 1.8% growth on average this year. In 2016, though, the German economy is likely to lose some momentum due to lower growth in the emerging economies. We envisage 1.5% German GDP growth next year, which is far less than the consensus figure of 1.9%", says Commerzbank.