IHS Global: German Ifo business climate data stage remarkable broad-based rebound led by expectations in September
Frankfurt/Main (28.9.16) – In September, the headline Ifo business climate index reflecting conditions in industry, construction, and wholesale and retail trade recovered in remarkable fashion, rebounding from 106.3 to a 28-month high of 109.5. The July/August post-Brexit declines have thus been fully recouped, the September level even exceeding that of June’s interim high by 0.8 points. It also exceeds the long-term average of 101.7 by a large margin. Historic extremes are a low of 83.7 in March 2009 in the wake of the Lehman collapse and an all-time peak of 114.3 in November/December 2010. The strong September data is broadly in line with latest manufacturing PMI developments. The Ifo institute comment on the latest data by saying that the German business world “expects a golden autumn”, having spoken of the cycle having “fallen into a summer hole” only one month ago.
The expectations component of the Ifo business climate survey increased sharply from 100.1 to 104.5. The increment of 4.4 points was last exceeded in mid-2009 when the German economy emerged rapidly from the post-Lehman recession, and the only other instance during the past 26 years that expectations improved this much in a single month was an outlier in February 2002. The level of 104.5 only juts falls short of the November 2015 interim high of 104.6 and is otherwise the highest since May 2014. It is also now well above its long-term average of 100.3 again. Meanwhile, current conditions did not improve as much as expectations, but they also increased markedly from 112.9 to 114.7, almost matching July’s 27-month high of 114.8 and widening the gap with its long-term average of 103.3. It should be kept in mind that even the latest downward correction of some length (during April-October 2014) only extended to 108.3, never even getting close to its long-term average. The all-time record of 121.9 seen in June 2011 should nonetheless not be at risk in the foreseeable future due to the high levels of international political uncertainty at present (including the Brexit, the unstable situation in the Middle East and Turkey, and the looming US elections).
The separate Ifo survey release about the climate in the service sector – a series available since January 2005 – signals an extension of the rebound observed since June, having temporarily shown a downward tendency during the first five months of 2016. The headline indicator improved from 29.8 to 32.2, thus newly approaching the all-time high of 34.7 of December 2015. September’s increase owed to both current conditions and expectations. The former recovered further from 37.8 to 39.9, while expectations posted their fourth increase in succession from 22.0 to an ten-month high of 24.7. The latter is no longer far from the all-time peak of 26.2 of November 2015, contrasting sharply with an interim low of 13.3 recorded as recently as in May. Current conditions, which had deteriorated by a much more limited amount in early 2016 (from 45.4 in December to 37.1 in March), have accordingly rebounded in a more restrained fashion in recent months. In any case, expectations and current conditions remain well above their long-term averages of 11.2 and 23.8, respectively. The bigger picture reveals that the overall service-sector index initially unwound the break-out to the upside observed in the second half of 2015 during Q1 2016, but has now recovered anew. During the almost twelve years of history of this service sector series, expectations have fluctuated between -25.6 (December 2008) and 26.2 (November 2015), and current conditions between -12.1 (May 2009) and 45.4 (December 2015).
Meanwhile, the breakdown of the main Ifo survey by sector, relating to goods production and trade, reveals that all sectors posted large increases based on improvements in both current conditions and expectations. Manufacturing led the way, boosted by a huge spike in expectations back to late 2015 interim highs. The Ifo institute did not comment about export performance, but a statement confirming that the business climate improved in almost all manufacturing branches implies that the mood among exporters brightened up too. The construction sector established a new post-unification all-time high, in this case driven the most by improving current conditions. The climate gain among retailers also benefited the most from rebounding current conditions (rendering this sub-index consistent with the favourable real income background again), whereas wholesalers displayed a large rebound in expectations that fully recouped the previous month’s sharp dip.
Overall, the September Ifo business climate report puts all notions of a slowing German economy during the second half of 2016 to rest. The knee-jerk downward correction triggered by the Brexit vote has been overcome three months on, not least due to the realization that any major changes in the UK’s trade relationship with the EU will not occur before 2019 or even later. This corroborates the encouraging evidence from manufacturing PMI data recently. By contrast, the similarly encouraging evidence of the services part of the Ifo survey in August/September is at odds with the large decline in that period of the headline business activity index of the service-sector PMI survey. Given the overall improvement regarding industry, construction, wholesale, and retail trade, it seems most likely that service-sector PMI will recover shortly. Germany’s current economic upswing is more domestically driven than in past cycles (owing to construction, private consumption, and equipment spending), but exports now look to be less of a drag than might have been thought recently. Meanwhile, the near-term impact of the refugee crisis on the economy will remain positive, as government consumption and investment is being raised, enabled by budget surpluses.
The September IHS forecasts for (calendar-adjusted) GDP growth in 2016 and 2017 were kept at 1.8% and 1.7%, respectively, having been raised in August from July’s 1.6% and 1.4% when the near-term Brexit impact turned out to be less severe than initially feared. Today’s Ifo data suggests that the anticipated acceleration of growth in the final quarter of 2016 will push average growth next year closer to the 2% level, whereas the average of 2016 will be impacted only slightly.
Stay In Touch