IHS Global: Conditions boost German Ifo business climate again in broad-based move across sectors during December

 

Frankfurt/Main (19.12.16) – In December, the headline Ifo business climate index reflecting conditions in industry, construction, and wholesale and retail trade increased anew after a brief halt in the previous month, rising from 110.4 to a 34-month high of 111.0. This compares to a pre-Brexit level of 108.7 in June and is far above the long-term average of 101.8. Historic extremes are a low of 83.7 in March 2009 in the wake of the Lehman collapse and an all-time peak of 114.2 in November 2010. The December improvement is in line with the fresh increase of manufacturing PMI for the final month of 2016. The Ifo institute comment on the latest data by saying that the German economy is in a “festive mood” and “staging a year-end rally”.

 

The expectations component of the Ifo business climate survey was broadly stable. Having rebounded markedly during September/October from an interim low in August before correcting somewhat in November, it inched up from 105.5 to 105.6 (just shy of October’s 30-month high of 106.0). This continues to exceed its long-term average of 100.4 by a sizeable margin. Meanwhile, current conditions advanced for the fourth consecutive month, rising from 115.6 to 116.6. This is the highest level of the last five years and sharply exceeds its long-term average of 103.4. It should be kept in mind that even the last downward correction of some length (during April-October 2014) only extended to 108.0, never even getting close to its long-term average. On the other hand, it still seems unlikely that the all-time record of 122.0 seen in June 2011 will be reached in 2017, given the high levels of international political uncertainty at present (including the Brexit, various elections in key European countries including Germany in 2017, the unstable situation in the Middle East and Turkey, and the unclear economic implications of the looming Trump presidency in the US).

 

In contrast to the industry and trade data described above, the separate Ifo survey release about the climate in the service sector – a series available since January 2005 – suffered a setback. The headline indicator declined from November’s all-time high of 35.0 (revised up from 34.8) to 31.7. This correction was mainly driven by current conditions. Following a record level of 46.3 in November, it has slipped to 41.4 in December. Expectations, which had already declined a little in November, fell to a lesser extent from 24.1 to 22.3. This remains closer to the all-time peak of 26.1 of November 2015 than to the interim low of 13.5 recorded in March. Generally speaking, both current conditions and expectations remain at historically very elevated levels, far above their long-term averages of 24.3 and 11.5, respectively. The development of the last 18 months 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 acquired new momentum since the spring. During the almost twelve years of history of this service sector series, expectations have fluctuated between -25.7 (December 2008) and 26.1 (November 2015), and current conditions between -11.0 (May 2009) and 46.3 (November 2016).

 

Meanwhile, the breakdown of the main Ifo survey by sector, relating to goods production and trade, reveals that the business climate in the manufacturing, construction, and wholesale sectors all improved while retail sentiment stagnated. The manufacturing climate did not quite manage to recover to October’s interim peak as expectations rebounded only modestly. Nevertheless, the Ifo institute emphasizes that both current demand and the stock of orders increased markedly, and that a higher number of firms are now planning production increases. Construction established yet another post-unification all-time high, owing to both current conditions and expectations. Business climate among wholesalers gained the most, rising to a near-three year high. This was exclusively due to a major spike of current conditions, however, whereas expectations corrected a little after their large increase in November. In retail trade, a rebound in expectations was exactly offset by a corrective dip for current conditions.

 

Overall, the December Ifo business climate report corroborates the view that German growth has accelerated markedly in the final quarter of 2016. The knee-jerk downward correction triggered by the Brexit vote has been recouped rapidly. The Ifo evidence is in line with a renewed upward tendency of German PMI data since September. Germany’s current economic upswing is more domestically driven than in past cycles (owing to private and public consumption and construction), but prospects for exports are better than the recent Q3 GDP data might suggest – especially given additional euro depreciation in the wake of Trump’s election in the US. It should also be kept in mind that the impact of the refugee crisis on the economy will remain positive, as government consumption and investment is being raised, enabled by budget surpluses.

 

The December IHS forecast for (calendar-adjusted) GDP growth in 2016 has been kept at 1.8%, but the prediction for 2017 was raised from 1.7% to 1.9%. This is mainly due to a more optimistic outlook for exports as the path for the euro-USD exchange rate has been lowered after the latest US developments (Trump presidency, Fed rate hike). That being said, a watchful eye must be kept on European political developments in 2017, specifically the Dutch, French, and German general elections. The same holds for uncertainty about economic policies in the US under the incoming new president Trump, as the potential discrepancy between campaign promises and actually realized policy appears particularly large in this case.

Timo Klein