German GDP expanded by a miraculous 2.2% in the second quarter (+4.1% yoy), beating all records. The Federal Statistical Office says the stimuli came mainly from exports and investment activity, but the growth was also driven partly by household and government consumption. In addition, it revised up the Q1 figure from 0.2% growth to 0.5%. (The lower growth rates announced originally fell far short of what our models forecast. This is the reason we partly discounted our models' forecast of 2% qoq for Q2. That has now proved to be unnecessary). The increase in exports comes as little surprise as the recovery of the global economy probably peaked in the first half. Most of the capital expenditure was probably in the construction sector, as considerable investment had to be postponed in Q1 because of the harsh winter.

Good start into Q3
Confidence indicators such as the ifo Index (up 4.4 points on the previous month) and the PMI (up 2.8 points) made veritable leaps in July and are now only a hair's breadth away from past highs. The export industry in particular is jubilant. Since the start of the year, foreign orders have increased by 3% per month on average. In June the value of German goods exports fell short of the June 2008 record by only 1.7%. This suggests that GDP will probably expand at around ¾% qoq in the third quarter, again outstripping trend growth.

GDP forecast for 2010 boosted to 3 ½%
Right at the start of 2010, Deutsche Bank was already among the first forecasters to look for 2% expansion in Germany in light of the increasing signs of a dynamic global recovery. Considering the excellent report for H1 the year-on-year performance at mid-year is now nearly 1 ½ pp higher than assumed to date. This has led us to raise our forecast for full-year growth - on an unchanged trend forecast for H2 - to 3 ½%. This is a really breath-taking number, but it has to be viewed in connection with the year-earlier slump, which the Federal Statistical Office also revised up from -4.9% originally to -4.7% now.

Eoin Treacy's view Germany offers a clear example of how a market leveraged to global growth can outperform in an environment where the wider Eurozone and US economies are struggling to perform but the world's population centres avoided recession entirely. Of course things would probably be a lot better if we were in a period of global economic expansion but in any context Germany's performance is admirable. However, this impressive growth rate also helps to highlight the imbalances evident in the Eurozone where fiscally responsible, low domestic demand, dynamic export hubs and high deficit, consumer led markets are governed by a single monetary policy. These differences are particularly evident in the sovereign bond markets.

Greek, Spanish, Portuguese, Irish and Italian 10yr spreads over German bunds all remain in medium-term uptrends which suggest that investors have yet to decide where fair value for these bonds lies. The extraordinarily tight spreads prior to the credit crisis were admittedly too optimistic but those that existed prior to the ERM (best seen on the Spanish and Italian longer-term charts) are probably too pessimistic. For the moment however, the trend is upwards and serious questions remain as to whether peripheral countries will have the stomach for fiscal discipline beyond the nadir of the crisis.

The wild cards in this equation are ECB purchases. The central bank succeeded in checking the advance of the above spreads earlier this year and is capable of doing so again. One might argue that intervening in sovereign debt markets is well beyond its defined mandate but that is a topic which is likely to be tackled only once the currency union's fiscal problems have been ironed out; if the political will exists for such existential soul searching.

The Euro encountered resistance at the its 200-day MA against the greenback at least in part because of the US Dollar's renewed safe haven status and expanding peripheral Eurozone spreads, . It pulled back sharply, at least checking the short-term rebound. The Euro has also weakened against currencies such as the Yen, Pound, Swiss Franc and perhaps more importantly against the South African Rand, Brazilian Real, Indian Rupee, Chinese Renminbi, Russian Ruble and a number of others. The silver lining for Europe's exporters is that a weak currency makes their products more competitive abroad and the travails of the periphery make a substantial tightening of fiscal policy less likely in the short term.

The DAX Index is among the better performers in the EU and the strongest of the Eurozone markets. It has found support on successive occasions in the region of the 200-day MA and would need to sustain a move below it to begin to question the consistency of the medium-term uptrend.