Grimaldi Finds German Ifo Secrets Buried in Google Translate
Intesa Sanpaolo SpA economist Annamaria Grimaldi has never lived in Germany and doesn’t speak the language, yet she’s still the top forecaster of the country’s most-watched economic indicator.
The Ifo institute’s business confidence index has confounded economists since September, exceeding the median estimate in Bloomberg News surveys each month. Milan-based Grimaldi, the most accurate forecaster in a Bloomberg ranking, said economists are getting it wrong because they’ve underestimated German exporters’ knack of finding markets for their products.
“The resilience of the German economy has been underestimated,” Grimaldi said. “The manufacturing sector is becoming increasingly more reliant on countries outside the euro zone, which are healthier and still growing.”
That’s helped keep Germany out of recession even as the debt crisis pushes major economies across Europe into protracted slumps. In March, German industrial production rose more than three times as much as economists had forecast and exports unexpectedly increased. Unemployment at a two-decade low has also helped insulate Germany by fueling domestic demand.
The European Commission this month increased its forecast for 2012 German economic growth to 0.7 percent from 0.6 percent and projected a 1.7 percent expansion in 2013. That compares with a 0.3 percent contraction this year in the euro area as a whole, followed by 1 percent growth next year.
Ifo’s business climate indicator, due for release on May 24, probably fell to 109.4 this month from 109.9 in April, according to the median forecast of 37 economists in a Bloomberg News survey. Grimaldi predicts a decline to 109.2.
Grimaldi, who uses Google Translate to research Germany, is an avid reader of Bundesbank research as well as German news outlets. She said surveys of purchasing managers outside Europe have also been good indicators of what Ifo will do.
“A lot of it is really digging into the numbers and trying to square up the different pieces of information, and it also needs a bit of luck sometimes,” said Grimaldi, 39.
Economists’ inability to model Ifo correctly is costing investors. The euro ended the day higher after every Ifo release since September, and surged by more than a quarter of a cent immediately after the report last month.
It also rose after data on May 15 showed Germany’s economy grew 0.5 percent in the first quarter, well above economists’ 0.1 percent median forecast in a Bloomberg survey. That resilience helped to keep the euro area out of recession, commonly defined as two straight quarters of contraction.
Carsten Brzeski, a former European Commission official who now works as a senior economist for ING Group in Brussels, said some forecasters may have underestimated the positive effects of the reforms carried out by Germany last decade, such as moves to make its labor market more flexible.
Another reason why the economy has outperformed expectations is that German companies have developed highly specialized products, he said. “German exporters don’t compete on price,” Brzeski said. “They are so specialized that there is much less competition globally, which has helped them crack emerging markets such as Asia.”
Even as demand waned in the euro region, Germany’s biggest export market, first-quarter profits at Bayerische Motoren Werke AG, Volkswagen AG and Daimler AG all beat analyst estimates. VW’s Audi unit will create 2,000 new jobs in Germany this year to meet demand in North America and Asia.
Brzeski, who underestimated Ifo on five of his last six predictions, expects a reading of 109.4 this month.
Kai Carstensen, who oversees the compilation of the Ifo business climate index, said Germany’s economy may continue to improve.
“The business climate is determined by more than just production,” Carstensen said. “Profit, margins, order books and the situation on the labor market play important roles. Hence, one shouldn’t be surprised that confidence has been better than many people thought.”
Bloomberg’s rankings require economists to submit forecasts for 15 of the 24 previous reports, two predictions in the last six months and one in the past three months. Ifo’s business climate is based on sub-indexes measuring companies’ assessment of current conditions and their expectations for the coming six months.
Jens Kramer, an economist at NordLB in Hanover who placed second in Bloomberg’s Ifo ranking, uses factory orders, terms of trade and other indicators to predict companies’ present situation. Kramer, who predicts Ifo will fall to 109.1 this month, looks at the 564-member Composite DAX to gauge what may happen in the next six months.
The index, which includes the shares of all companies listed on the stock exchange in Germany, gained 18 percent in the first quarter of this year. Since then, it has shed 6 percent, which may suggest growth will slow in the second quarter.
“In 90 percent of the cases our model works; the rest is gut feeling,” said Kramer, 50. To guide his intuition, he speaks directly to companies to assess their health.
“It’s anecdotal, but I place a lot of weight on it,” he said. “You get a feeling for how they’re doing, and since the debt crisis started, they’ve never sounded like they’re in a recession.”
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