IHS Global: German Ifo business climate index rebounds to surprisingly large extent in March, current conditions and expectations both improve
Frankfurt/Main (22.3.16) – In March, the headline Ifo business climate index reflecting conditions in industry, construction, and wholesale and retail trade rebounded from a 14-month low of 105.7 to 106.7, interrupting and potentially ending the downward correction of the past three months. The level of 106.7 compares to the most recent interim peak of 109.1 in November 2015, a cyclical high of 110.9 in February 2014, and a long-term average of 101.6. Historic extremes are a low of 83.5 in March 2009 in the wake of the Lehman collapse and an all-time peak of 114.3 in December 2010. The recovery of the Ifo index in the latest reporting month, and of expectations in particular, reassures that Germany’s near-term economic outlook is better than commonly portrayed in recent months. The Ifo institute comment on the latest data by saying that German businesses enter the spring season with less scepticism than before. The fresh stabilization tendency emerging with these latest Ifo survey developments are in line with similar movements of the manufacturing PMI and ZEW indicators.
In March, the expectations component of the Ifo business climate survey rebounded from 98.9, its lowest level since end-2012, to 100.0. This seems to reflect that companies are getting to terms with the economic problems observed in many emerging markets (including China) and with geopolitical instability in many regions. The level of 100.0 nonetheless remains marginally below the long-term average of 100.3, not to speak of the interim high of 104.8 seen as recently as in November 2015. Interestingly, 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 before recovering. Meanwhile, the current conditions component extended the previous month’s rebound, increasing from 112.9 to 113.8. The assessment of current activity is thus newly approaching the 16-month high of 115.0 of August 2015 and is way above its long-term average of 103.1 – although the all-time record of 122.2 seen in June 2011 remains out of reach for now. 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 108.2, never even getting close to its long-term average.
In contrast to the goods related sectors described above, today’s separate Ifo survey release about the climate in the service sector – a series available since January 2005 – posted the third decline in a row in March. Following an all-time high of 34.1 in November and December 2015, the headline services index declined from 27.3 (revised up from 27.2) to a 12-month low of 24.0. Downward impulses came from both expectations and current conditions. Expectations, which had reached an all-time peak of 26.9 already in November 2015, weakened for the fourth consecutive month from 16.0 to 12.9, and current conditions failed to sustain February’s partial rebound and slipped from 39.3 (revised up from 39.1) to 35.6. Nevertheless, both components remained above their long-term averages of 11.0 and 23.1, 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 March level still exceeds most levels prior to 2015 observed 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 -10.2 (May 2009) and 44.2 (September 2015).
Meanwhile, the breakdown of the main Ifo survey by sector, relating to goods production and trade, shows that all sectors apart from construction improved in March, reversing the picture gleaned from February data. The business climate in the manufacturing sector recovered by a fair amount, driven mostly by expectations but also accompanied by the second improvement in current conditions in a row. Expectations improved in all sectors except for wholesale trade (repeating February’s pattern), and the assessment of current conditions improved everywhere apart from the construction sector, where there was a correction following February’s all-time record. Building sector expectations, which had been slipping in recent months in the wake of a post-unification and thus 25-year high in November 2015, appears to be stabilizing now. Meanwhile, wholesaler sentiment improved due to current conditions alone, whereas the climate among retailers rose sharply as a large spike for current conditions was accompanied by a moderate rebound in expectations. The jump in current conditions in the retail sector should not surprise in view of persistently favourable real income developments following the latest additional drop in oil prices since late 2015.
Overall, the March Ifo business climate report confirms our long-standing suspicion that gloomy predictions heard in many quarters in recent months – partly indeed based on the Ifo index setback of the December-February period – have overstated matters. Improving consumer demand, as visible not only in the retail sector but also from the views of consumer goods producers in the industrial sector, is increasingly offsetting ongoing exporter woes linked to emerging market problems. In view of the oil price rebound in recent weeks, it seems likely that the recovery of manufacturing sector expectations in March will continue during the second quarter. The fresh slippage of the Ifo service-sector index in March does not quite fit into the picture, but it needs to be remembered that this index was at all-time highs towards the end of 2015. Furthermore, the services PMI data also released today remained quite elevated in March. Overall, there is little reason for German consumption (both private and public) or construction to lose momentum in the months ahead, with fresh strengthening being the more likely scenario. Furthermore, even with respect to exports, it should be noted 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 still fairly 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 March 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 rather accelerate during the first half of 2016. 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.
Stay In Touch