IHS Global: Plunging expectations depress German Ifo business
climate index in February despite improving current conditions
Frankfurt/Main (23.2.16) – In February, the headline Ifo business climate index reflecting conditions in industry, construction, and wholesale and retail trade declined fairly markedly from 107.3 to a 14-month low of 105.7. This compares to the most recent interim peak of 109.0 in November 2015, a cyclical high of 110.8 during January-March 2014, and a long-term average of 101.6. Historic extremes are a low of 83.6 in March 2009 in the wake of the Lehman collapse and an all-time peak of 114.3 in December 2010. The decline of the Ifo index in the last three months clearly reinforces market concerns about Germany’s near-term economic outlook, especially as expectations deteriorated so much (the last comparable dip in a single month occurred during the Lehman crash in 2008). The Ifo institute comment on the latest data by saying that worries in the German economy have grown, especially so in the industrial sector. Recent Ifo survey developments are in line with the slippage seen for manufacturing PMI and ZEW indicators, but they contrast with persistently robust services PMI data.
In February, the expectations component of the Ifo business climate survey fell from 102.3 to 98.8, its lowest level in over three years. This apparently reflects companies’ heightened worries about economic problems in many emerging markets (including China) and geopolitical destabilization in many regions. Following an interim high of 104.8 only in November 2015, the level of 98.8 represents a drop below its long-term average of 100.3. That being said, it remains far above its post-Lehman all-time low of 78.6 in December 2008. For comparison, the expectations sub-index had similarly deteriorated temporarily during 2014, slipping from a 35-month high of 108.1 in January to 99.3 in October 2014. In marked contrast with latest developments among expectations, the current conditions component actually rebounded modestly from 112.5 to 112.9 in February, thus broadly maintaining the elevated levels of 2015. The assessment of current activity remains much closer to the 16-month high of 114.9 in August 2015 than to the long-term average of 103.0. The underlying robustness of current conditions is also underlined by the fact that the most recent downward correction of some length (during April-October 2014) only extended to 108.1, never even getting close to its long-term average.
Today’s separate Ifo survey release about the climate in the service sector – a series available since January 2005 – slipped modestly in February, having retreated fairly sharply the month before from an all-time high in December 2015. The headline services index declined from 28.1 (revised up from 27.9) to a seven-month low of 27.2. As with the goods related sectors described above, this was the net result of worsening expectations but improving current conditions. Expectations, which had reached an all-time peak of 26.9 in November 2015, weakened for the third consecutive month from 19.2 (revised up from 19.1) to 16.0, whereas current conditions partially recouped January’s sharp decline by increasing from 37.5 (revised up from 37.0) to 39.1. Both components remained above their long-term averages of 10.9 and 23.0, respectively. Although some cautions is now advised with respect to the near-term outlook, it should be noted that the overall service-sector index has so far only unwound the break-out to the upside during the second half of 2015 – the February level still exceeds the level of almost any month prior to mid-2015 since the start of this series in 2005. During the eleven years of history of this service sector series, expectations have fluctuated between -25.1 (December 2008) and 26.9 (November 2015), and current conditions between -10.5 (May 2009) and 44.0 (September 2015).
Meanwhile, the breakdown of the main Ifo survey by sector, relating to goods production and trade, shows that the manufacturing, retail, and wholesale sectors deteriorated, whereas construction rebounded modestly. The business climate in the manufacturing sector clearly worsened the most, although even here this was exclusively down to expectations while the assessment of current conditions improved slightly. Expectations deteriorated in all sectors except for wholesale trade, where they stagnated. In the construction sector, developments of expectations and current conditions diverged to an even greater degree than in manufacturing. Building sector expectations, having reached a post-unification and thus 25-year high as recently as in November 2015, fell markedly anew, whereas the assessment of current conditions improved to a new all-time record. Meanwhile, wholesaler sentiment worsened modestly due to current conditions alone, and the climate among retailers deteriorated moderately due to a fresh drop in expectations. Current conditions in the retail sector remained broadly stable at historically still elevated levels, which should not surprise in view of persistently favourable real income developments following the latest additional drop in oil prices since late 2015.
Overall, the February Ifo business climate report makes for some gloomy reading at first glance, with exporter woes linked to emerging market problems having a significant negative impact on headline data. Beyond manufacturing expectations, however, there has been only little deterioration lately, and one should not rule out a surprisingly rapid recovery of those expectations if oil prices were to rebound to some extent. The dichotomy between robust domestic demand and export weakness due to slower global trade growth remains in place. There is little reason for German consumption (both private and public) or construction to lose much momentum in the months ahead. Furthermore, even with respect to exports, it should be remembered that external trade with the rest of Europe and the US represent about three-quarters of German exports, and these regions are doing much better than emerging countries at present. In addition, the weak euro should enable Germany’s export sector to raise its market share in the non-Eurozone world. The near-term impact of the refugee crisis on the economy will be positive, as credit-financed government consumption is being raised currently.
The February IHS estimate for annual average GDP growth in 2016 is being kept at 1.9% (calendar-adjusted), following 1.4% in 2015. German consumer demand has been growing at a pace of around 0.5% q/q since mid-2014 and this should be maintained during the next few quarters. High nominal and – given near-zero inflation – real wage growth, ongoing employment gains, and extremely low interest rates that discourage saving are all factors bolstering consumer spending.
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