Vive la divergence!

Chart of the week

The mood among German businesses appears much worse than among their French counterparts. This has consequences, not least for both countries' stock markets.

Sentiment in the German economy has deteriorated significantly. The ifo Business Climate Index, compiled by the Munich ifo Institute, is probably the most widely used gauge for Germany’s corporate mood. As our "Chart of the Week" demonstrates, the assessment of the business situation has been deteriorating for one year. As of now, the sentiment indicator has fallen to levels which were last observed in 2012, i.e. at the height of the euro crisis.

The French counterpart to the ifo Index, the Business Climate Index compiled by INSEE Institute, has tended to have quite a high correlation with the ifo for much of its history. Lately, however, their paths have been diverging. Although sentiment on the other side of the Rhine is worse than it was two years ago, the mood in France has already begun to improve again since the beginning of 2019.

What might be the reasons behind this divergence? The German economy is under fire from two sides. On the one hand, the high dependence on exports is a disadvantage in times of the global trade conflict. In addition, the industrial sector is weakening all over the world. As we already showed in May, the contribution of industry to total value added in France is less than half that of Germany. On the other hand, France has got a bigger public sector. In times of weakening global demand, this historically has been stabilizing in the short term. From a longer perspective, one might take a more nuanced view.

This divergence in the assessments of the economic prospects is also reflected in the equity markets. Since the beginning of 2018, the French CAC 40 is more than 15% ahead of the Dax, its German counterpart (excluding dividends).

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Sources: Bloomberg Finance L.P., DWS Investment GmbH as of 10/1/19

 

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