IHS Global: German Ifo business climate extends manufacturing-led
rebound in March to reach highest level since mid-2011
Frankfurt/Main (27.3.17) – In March, the headline Ifo business climate index reflecting conditions in industry, construction, and wholesale and retail trade extended the previous month’s rebound by the same margin, increasing from 111.1 (revised up from 111.0) to 112.3. This is the highest level since July 2011, when the German economy was in the closing stages of the post-Lehman recovery of 2010-11. Germany’s business climate is now clearly better than just before the UK’s Brexit decision in June 2016 (108.8), not to speak of its long-term average of 101.9. For comparison, historic extremes are a low of 83.5 in March 2009 in the wake of the Lehman collapse and an all-time peak of 114.2 in November 2010. The recent rebound brings the Ifo data back in line with the improving manufacturing PMI indices in recent months. The Ifo institute comment on the latest data by saying that the “upswing is gaining momentum”.
The expectations component of the Ifo business climate survey was the main driving force in March, its index extending February’s rebound from 104.2 (revised up from 104.0) to 105.7. This almost matches last October’s interim 30-month high of 106.0, and it is now sizeably above its long-term average of 100.4. Meanwhile, current conditions advanced for the seventh consecutive month, rising from 118.4 to 119.3. This is the highest level since July 2011 and is even approaching the all-time record of 122.1 observed in June 2011. Note that the last time that the current conditions index has been below the present long-term average of 103.6 was almost seven years ago. Thus the last downward correction of some length (April-October 2014) troughed at 108.2. The historically high levels at present are all the more remarkable in view of the multiple factors boosting international political uncertainty currently (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 Trump presidency in the US).
Note that the release of the separate Ifo survey about the climate in the service sector – a series available since January 2005 – will now always be a day after the release about conditions in industry, construction, and wholesale and retail trade described above. February’s services survey (released on 23 February) had revealed a third consecutive decline after an all-time high of 35.3 in November 2016, slipping from 28.7 in January to 27.0 in February. This moderate further setback was driven by expectations alone, which slipped from 19.1 to 15.2 (having reached an interim peak of 24.8 in October 2016 and an all-time high of 26.2 in November 2015). By contrast, current conditions stabilized after two months of declines, rebounding from 38.8 to 39.4 (they had established an all-time high of 47.1 in November 2016). Current conditions are thus still well above their long-term average of 24.5, whereas the gap of expectations to their long-term average of 11.6 has become relatively narrow. The development of the last 21 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, then rebounded anew to a record level in November 2016, but has encountered a fresh setback around the run of the year 2016/17. During the almost twelve years of history of this service sector series, expectations have fluctuated between -25.7 (December 2008) and 26.2 (November 2015), and current conditions between -10.4 (May 2009) and 47.1 (November 2016).
Meanwhile, the breakdown of the main Ifo survey by sector, relating to goods production and trade, reveals widespread improvements. The only exception is the business climate in the wholesale sector, which had shown the largest gain in February by far and that has now corrected about half of that increase. This correction owed mostly to expectations, whereas current conditions remained within striking distance of the previous month’s multi-year high. Among the three other sectors, the climate in manufacturing improved the most, followed by retail trade and construction. Like the headline Ifo index, the manufacturing index has reached its highest level since July 2011, driven especially by expectations this time while the gain of current conditions was more limited. The Ifo institute add that current demand picked up additional momentum and that indices rose in almost all important industrial sectors. Construction has rebounded moderately due to both current conditions and expectations, thus unwinding about 30% of its January-February decline. The recent sharp drop from its December 2016 (post-unification) all-time high had been mostly due to deteriorating expectations. Finally, retail trade confidence recovered too, in this case solely because of a sizeable rebound in current conditions.
Overall, the March Ifo business climate report was unexpectedly strong and clear evidence of increasing momentum in the German economy. It corroborates a similar message to that conveyed by rising German manufacturing PMI data since last September. Manufacturing sector exports are apparently benefiting from brighter global demand prospects and the weaker euro, and construction and retail trade apparently remain well underpinned despite their recent setbacks. Construction in particular continues to be structurally supported by factors such as demographics and persistently low interest rates. The weaker retailer climate of late is attributable to the spike in inflation since December 2016, a view that is corroborated by the declining climate in the services sector during December-February. Meanwhile, the impact of the refugee crisis on the economy will remain positive, as government consumption and investment are being raised, enabled by budget surpluses.
The March IHS Markit forecast for (calendar-adjusted) GDP growth in 2017 has been kept at 1.9% and that for 2018 at 1.8%. The first quarter should be particularly strong at 0.6% q/q or even slightly more. That being said, a watchful eye must be kept on European political developments this year, specifically the French and German general elections and the development of Brexit negotiations between the UK and the EU. The same holds for uncertainty about economic policies in the US under president Trump, which could potentially be quite disruptive for the global economy if the country turns decisively away from multilateralism, embraces protectionism in a major way, and severely hinders immigration.
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