IHS Global: German Ifo business climate index broadly consolidates March rebound during April, separate services survey recovers
Frankfurt/Main (25.4.16) – In April, the headline Ifo business climate index reflecting conditions in industry, construction, and wholesale and retail trade slipped marginally from 106.7 to 106.6, thus effectively consolidating the previous month’s rebound from February’s 14-month low of 105.7. The level of 106.6 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 recent rebound of the Ifo index, with expectations improving in both March and April, indicates that the momentum of German economic growth has been picking up again lately. The Ifo evidence is also consistent with similar improvements of the PMI and ZEW leading indicators in March/April. The Ifo institute comment on the latest data by saying that the German economy remains in a “moderate upswing”.
The expectations component of the Ifo business climate survey extended their March rebound from 100.0 to 100.4. This corroborates the impression that companies have adjusted to the economic problems and in part enhanced geopolitical instability observed in many emerging markets (including China). The level of 100.4 marginally exceeds the long-term average of 100.3, but it still falls well short for instance 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 had a modest dampening effect, declining from 113.8 to 113.2. Nevertheless, the assessment of current activity remains quite elevated, being much closer to the 16-month high of 115.0 of August 2015 than its long-term average of 103.1. 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. The all-time record of 122.2 seen in June 2011 is not in danger any time soon, however.
Adding to the generally encouraging news, today’s separate Ifo survey release about the climate in the service sector – a series available since January 2005 – has recovered markedly in April, partially correcting for the significant downward correction observed during the first quarter of 2016. Having hit an all-time high of 34.3 in December 2015 and subsequently an 11-month low of 24.1 in March, the headline services index has now rebounded to 27.8. This recovery was supported by both expectations and current conditions. Expectations, which had reached an all-time peak of 26.9 already in November 2015 before weakening to eventually 13.0 in March, has increased back to 15.6. Current conditions increased to an even greater extent from 35.9 (revised up from 35.6) to 40.7, which is the highest level in 2016 so far. Both components have thus widened the gap versus their long-term averages of 11.0 and 23.3, respectively. Furthermore, in net terms, the overall service-sector index has thus only unwound the break-out to the upside of the second half of 2015 during 2016 so far – with only two exceptions during 2010-11, the April level exceeds everything observed prior to 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 -10.1 (April 2009) and 44.6 (September 2015).
Meanwhile, the breakdown of the main Ifo survey by sector, relating to goods production and trade, shows a split picture. The business climate in the manufacturing sector recovered for the second consecutive month and construction rebounded modestly, whereas wholesale and retail trade – driven by both expectations and current conditions – revealed deterioration. In manufacturing, expectations – which had suffered around the turn of the year 2015/16 – provided for the overall improvement, whereas construction sector sentiment gained due to a better assessment of current conditions (approaching anew February’s all-time record). Building sector expectations, despite having slipped in recent months in the wake of a post-unification and thus 25-year high in November 2015, remain quite high. Worsening sentiment in the wholesale and retail sectors needs to be seen against the background of elevated or even – in the case of retail trade – rising levels in the preceding month. These generally good conditions are based on persistently favourable real income developments, whereas the April dip may be linked to the partial oil price rebound recently.
Overall, the April Ifo business climate report serves as further reassurance that the setback observed around the turn of the year 2015/16 was a temporary affair. Improving consumer demand offsets still persisting weak external demand linked to emerging market problems. In view of the recent oil price rebound, the recovery of manufacturing sector expectations should continue in the months ahead. The construction sector remains supported for demographic and interest rate reasons. Meanwhile, the rebound of the Ifo service-sector index in April signals that this section of the economy is also not weakening lastingly, instead remaining at fairly elevated levels historically (keeping in mind that this index was at all-time highs at end-2015). 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 better than emerging countries at present. Finally, the near-term impact of the refugee crisis on the economy will be positive, as credit-financed government consumption is being raised currently.
The April IHS forecast 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.
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