The Ifo current conditions has increased to a new all-time high. This is much better Ifo (May 2011) than feared following yesterday’s disappointing PMI data. The German Ifo expectations index decreased slightly, but still remains at a high level. This is in line with our expectations of strong German growth of 3.6%. Looking forward, we expect Ifo expectations to decline moderately. Our Ifo expectations model is clearly pointing downwards now. Today’s release supports our expectation that the ECB will deliver hikes again in July, October and January. Ifo current conditions at highest level in 20 years Ifo current conditions increased slightly from 121.0 to 121.4, which is much better than expected – especially taking yesterday’s poor PMI data into account. This is the highest level recorded. Expectations only declined slightly from 107.7 to 107.4. This means that the aggregate Ifo business climate was unchanged at 114.2. Manufacturing expectations decreased slightly from 105.7 to 104.8 – less than indicated by yesterday’s sharp drop in PMI manufacturing. Today’s release is much better than expected. If this data is correct, our estimate of 3.6% GDP growth in Germany this year seems to be on the low side. We thus stick to our expectations for the ECB to deliver hikes again in July, October and January. Looking forward, we expect Ifo expectations to decline moderately. Our Ifo expectations model is clearly pointing downwards now and the OECD leading indicator is much more downbeat and signals that we could see a more notable decline in Ifo expectations. We also assess that current conditions is at its peak. German Q1 GDP: Very strong headline but weaker details German Q1 GDP details released this morning were slightly disappointing with regard to private consumption. We still haven’t seen strong growth in private consumption. An increase of 0.4% q/q was slightly lower than consensus expectations but an upward revision of 0.6% in Q4 offsets this. The moderate increase in private consumption in Q1 is partly due to increased prices. In current prices private consumption increased 1.1%, which isn’t that bad. Government consumption increased by 1.3% q/q, which was much more than expected. On a positive note, investments increased 5% driven by strong increases in both machinery and equipment (4.2%) and in construction (6.2%) – confirming that we see a recovery in the German property market. Exports increased 2.3% while imports only increased 1.5%, so net exports still contribute to growth – albeit not as much as domestic demand, which pulled as much as 1.1 percentage points in Q1. We expect a slowdown in the coming quarters and project German GDP growth to reach 3.6% in 2011 and 2.3% in 2012.

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