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Why Europe’s Biggest Economy Is Stirred, Not Shaken by Brexit

Posted by hkarner - 26. Juli 2016

Date: 26-07-2016
Source: The Wall Street Journal

Reichstag CCThe shock result of Brexit so far is that there is little sign of shock in Germany, Europe’s powerhouse economy

Brexit hasn’t gone global. Indeed, European data are suggesting it is staying surprisingly local so far.

Monday’s reading for the widely watched German Ifo business climate index—which covers manufacturing, construction, wholesale and retail companies in Europe’s biggest economy—is a case in point.IFO Business Index Germany

The headline index dipped to 108.3 in July from 108.7 in June. But that was both better than expected and still the second-highest outcome this year. Business expectations slid, but only marginally.

The Ifo index echoes Friday’s Markit purchasing managers index. The U.K. measure recorded the biggest one-month drop on record. But the German composite reading advanced to a seven-month high of 55.3.

Focusing too much on Brexit might be a mistake for investors looking at Europe. Hopes are building for a recovery in emerging markets, and the U.S. economy is continuing to grow. Meanwhile, domestic demand has been the linchpin for eurozone economies such as Germany. Notably, service-sector expectations rose to a six-month high in July, a separate Ifo survey shows.
Germany’s Ifo business climate index was better than expected despite the U.K.’s Brexit vote.

True, European stock markets are still in the red for the year. But that is due to the big downswing in January and February—a global phenomenon. Brexit is fresher in investors’ minds, but has so far had a smaller and less persistent effect on stock prices. Germany’s DAX has recovered nearly all of the ground it lost after the vote.

Over time, of course, the U.K. vote could have a bigger impact. The risk of political turmoil remains high. But the presumed initial shock reaction is striking in its absence.

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