German IFOs this morning came in mostly softer than forecast as all signals now point to a significant slowdown in German economic growth. The business climate survey came in at 112.9 missing expectations of 113.7 and dropping from 114.5 in June, marking the lowest reading since October 2010. The current assessment survey came in at 121.4 amid expectations of 122.3 and a previous record high of 123.3, this marked the lowest reading in 3 months and the first decline since January. The expectations survey fared a little better coming in as expected at 105.0 but this still marked a drop from 106.2 (revised lower) in June, it was also the fifth consecutive decline and the lowest reading since January 2010. We forecast additional declines for PMIs as well as the ZEW and IFO surveys in coming months. The German economy will maintain some momentum through Q2 but we see the slowdown in global growth really taking hold as weaker demand for German exports damps economic activity and the already tepid levels of domestic demand shrink further.
Even as the Greek debt issue nears resolution after yesterday’s agreements we don’t believe that the EMU is out of the woods yet as slowing growth across the region is set to wreak havoc across the already weakened periphery. Yesterday’s string of very soft PMIs from France, Germany and the euro-zone confirm the extent to which the core economies are slowing and even nearing the critical expansion/contraction 50-level. With much of the debt plan based on the assumption that periphery nations can become more competitive in the global market a slowing global economy is likely to scupper these plans.
We entertained yesterday the possibility of public pressure in Germany, amid a slowing economy, forcing the government to reconsider some of its promises to bailout indebted nations and certainly have serious obstacles to coughing up any more money. We see souring public opinion as one of the largest potential issues that Germany will have to deal with into the third quarter of the year. Even after the Greek deal details get hammered out and lift both consumer and business sentiment we still see risks skewed to the downside as the omens going forward darken.
The euro was relatively unmoved in the aftermath of the German data as many players elect to wait and see what the final details of the bailout plan are and, more importantly, how the ratings agencies react. Looking at this daily chart we can see that as Eur/Usd rolls over after yesterday’s outsize gains it is the process of potentially forming yet another lower top, keeping pressure on the downside. Should a lower top be put in place then once again we will be looking to the downside and another test of the psychological 1.4000 level. Even if euro bulls get caught up in the euphoria of the Greek deal and elect to drive the pair higher we are bearish on the euro going into Q3 for the aforementioned fundamental growth reasons.
Written by Jonathan Granby, DailyFX Research Team