Further deterioration of German Ifo business climate in December raises risk of more pronounced economic slowdown in 2019
Frankfurt/Main (18.12.18) – In December, the headline Ifo business climate index reflecting conditions in industry, services, trade, and construction has declined for the fourth consecutive month from 102.0 to a 24-month low of 101.0. That being said, this level of 101.0 is roughly in the middle between the December 2017 series (post-2004) high of 105.2 and the long-term (2005-2018) average of 97.6 (let alone the post-Lehman all-time low of 80.2 in March 2009). Notwithstanding this general resilience of the German economy to the ongoing headwinds from external developments (especially US protectionism and Brexit concerns), the risk of a more pronounced economic slowdown in 2019 than previously anticipated has increased. The Ifo institute comment on the latest data by stating that “concern is growing among German businesses” and that “the German economy faces a lean festive season”.
Note that other leading indicators such as the purchasing managers’ index (PMI) and the ZEW survey, which had reflected a much more pessimistic view of the state of the business cycle during most of 2018 than the Ifo survey, have shown some stabilization during November-December. As such, the three surveys have come more into line with each other by the end of 2018.
The expectations component declined somewhat more steeply than the current conditions component, which clearly does not bode well for the near-term. It worsened from 98.7 to a four-year low of 97.3 that also undershoots its 98.3 long-term (2005-2018) average. Meanwhile, the current conditions declined from 105.5 (revised up from 105.4) to 104.7. Unlike in the case of the expectations component, however, this is still well above its long-term average of 96.9 and indeed closer still to its series high of 109.1 in January 2018. Furthermore, current conditions remain above any level observed between the beginning of this series in 2005 and mid-2017. Although the expectations component obviously leads the current conditions index within the business cycle, the gap between the two is significantly larger this time than at the beginning of previous downswings for instance in April/May 2008, mid-2011, or mid-2014 (in the latter case even non-existent). This puts matters into perspective.
The December breakdown by sector reveals that the latest deterioration was driven to a similar extent by manufacturing and services, whereas the trade component declined only modestly and construction sector climate was unchanged from November. The manufacturing sector suffered mostly from deteriorating expectations, indeed moving into negative territory for the first time since May 2016 and thus motivating firms to adjust their production plans downward. By contrast, the decline in the service sector was driven more by current conditions. In the trade sector, there was little difference between the slippage of expectations and that of current conditions, but the distinction between wholesale and retail trade revealed – reversing November developments – that the former actually improved modestly (while being overcompensated by the dip in the retail sector climate). Finally, the construction sector, which had posted a fresh all-time high every month during July-October before suffering a setback in November, has stabilized anew. Although expectations did worsen slightly for the third month in a row, current conditions climbed to a new all-time high.
Overall, the additional weakening of the Ifo business climate survey in December signals that the economic slowdown that began around mid-2018 will be more persistent than previously believed. At the same time, the still unusually high level of the current conditions component indicates that the resilience of the German economy to dampening factors from abroad remains considerable. The Ifo survey, which for a long time had painted a clearly brighter picture of the prospects for the German economy than other leading indicators such as the PMI and the ZEW surveys, is now more consistent with the latter two. It should be kept in mind that even in early December the cyclical picture has been muddied by special factors, namely the distortions stemming from the impact of the new emission standards on the auto sector and of low river water levels on rivers on commodity transports notably for the chemical sector. Furthermore, fuel and heating oil prices have only declined significantly over the last week or so, in a lagged reaction to the oil price decline since mid-October. As such, this year’s boost to consumer demand from above-average wage and pension increases and persistently good labour market conditions will only now be no longer offset by the loss in purchasing power from high energy price levels. The odds for a rebound of the Ifo business climate index in January are thus quite good. Finally, the construction sector will remain at historically high activity levels in any case given structural support from demographics, pent-up demand, and still very low interest rates.
The latest IHS Markit forecasts for (calendar-adjusted) GDP growth are 1.5% for 2018 and 1.4% for 2019. Although the anticipated GDP rebound in the fourth quarter to the contraction in Q3 is expected to remain restrained (0.3% q/q), the first quarter of 2019 should reflect more of an upward correction (0.6% q/q). The latter should also be helped by the fiscal loosening measures enacted from January onwards. Thereafter, however, quarterly GDP growth should stabilize in the 0.3% area during the remainder of 2019. With Germany’s public finances remaining in a very healthy state, the government could afford to implement additional measures to prop up demand in case external events (no-deal Brexit?) weigh even more heavily on the economy in the year ahead.
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