IHS Global: German Ifo business climate expectations component surprisingly improves in October, separate services index reaches all-time high
Frankfurt/Main (26.10.15) – In October, the headline Ifo business climate index reflecting conditions in industry, construction, and wholesale and retail trade unexpectedly slipped only marginally from 108.5 to 108.2, remaining close to April’s interim high of 108.6 and not too far off its most recent cyclical high of 110.9 in January/February 2014. The overall index level of 108.2 also compares favourably to a long-term average of 101.5 and the October 2014 interim low of 103.6. Historic extremes are a low of 83.6 in March 2009 in the wake of the Lehman collapse and an all-time peak of 114.4 in December 2010.
Recent developments show that uncertainty surrounding Greece has only led to a modest two-month dip by 1.0 points in May/June, which compares to a much larger downward correction by 7.3 points in 2014 (between March and October) due to geopolitical concerns (Ukraine/Russia, IS threat in Iraq and Syria) and emerging market problems caused by the US Fed’s shift towards less expansionary monetary policy. The Volkswagen scandal, which had been expected to leave a dent especially in the October data, failed to hurt – indeed, the climate index for the automobile sector alone even increased, owing to both current conditions and expectations. This argues against any negative repercussions on the international reputation of German industry. The massive oil price decline and extensive weakening of the euro since mid-2014 remain important supportive factors for German companies. Ifo index developments since November 2014 continue to convey a stronger impression of the German economy than the PMI data, let alone the ZEW survey.
Most surprising about the October outcome was that expectations extended the previous month’s rebound, which runs counter to a common perception of worsening global growth prospects (notably in China) and mounting refugee related problems. The Ifo survey component reflecting six-month expectations increased from 103.3 to 103.8, matching the interim high seen in March and clearly exceeding its long-term average of 100.3. The expectations sub-index had deteriorated during 2014 from a 35-month high of 108.2 in January to 99.2 in October 2014 before rebounding. This rebound was apparently interrupted only temporarily during the second quarter. For comparison, the Lehman related all-time low had been massively lower at 78.6 in December 2008. Meanwhile, it was the current conditions component that weakened for the second consecutive month, slipping from 114.0 to 112.6 (down from a 16-month high of 114.8 in August and a two-year high of 115.5 back in March 2014). Nevertheless, the latest level remains fairly high historically. The underlying robustness of current conditions is underlined by the fact that the interim April-October 2014 downward correction to eventually 108.0 never undercut the interim trough of 106.7 in December 2012, not to speak of the long-term average of currently 102.9.
Furthermore, today’s separate Ifo survey release about the climate in the service sector – a series available since January 2005 – revealed a fresh all-time high after September’s small correction. The headline services index increased from 30.5 (revised up from 30.2) to 32.4. As in the case of the main Ifo business climate survey described above, the latest increase was entirely driven by the expectations component, which increased markedly from 18.7 to a near-five-year high of 24.4 (long-term average is 10.6). By contrast, current conditions slipped from an all-time high of 42.9 to 40.7 (long-term average 22.5). The headline service-sector index had demonstrated a sideways tendency between mid-2012 and November 2013, followed by a break-out to the upside around the turn of the year 2013/14, and then another sideways trend at a new elevated level for a year. This has now been left behind for yet higher territory in recent months. During almost eleven years of history of this service sector series, expectations have fluctuated between -25.1 (December 2008) and 25.9 (November 2010), and current conditions between -11.9 (May 2009) and 42.9 (September 2015).
Meanwhile, the breakdown of the main Ifo survey by sector, relating to goods production and trade, shows a slight decline of the climate in the manufacturing sector and a larger one in retail trade, while sentiment in the wholesale trade stagnated and that in construction improved modestly further. Looking at expectations alone, however, the only (slight) decline was observed in the retail sector, and this needs to be seen against the background of a sharp rebound during August/September. The largest improvement in expectations occurred in the building sector, extending an increase that has now already lasted for seven consecutive months. The overall construction sector climate has now reached its highest level since January 2014, a level that in any case exceeds by far what had been observed during a near-20-year period between 1992 and 2010. By contrast, current conditions deteriorated in all sectors, albeit only modestly in most cases. The only sizeable dip occurred in the retail sector, but as with expectations in this sector, this only (partially) corrects for a surge during August/September. Macroeconomic conditions remain very favourable for consumers, which can also be gleaned from the expectations-driven new all-time high of the Ifo service-sector survey this month. In the manufacturing and wholesale sectors, worsening current conditions were (partly) offset by slightly improved expectations. The Ifo report also mentions that capacity utilization in the manufacturing sector increased marginally to 84.4%, a level that is modestly above the long-term average (83.4%).
Overall, the October Ifo business climate report once again underlines the strength in underlying domestic demand, specifically of private consumption and construction, which is making the economy quite resilient to any dampening influences from abroad. The latter refers to developments in many emerging markets – most notably China – at present, although it should be noted that average developments in the Eurozone are still following a tendency towards slightly accelerating economic growth, leaving behind the fragility of 2009-2013. The overall picture for Germany’s exports thus remains solid anyway, also keeping in mind the ongoing support from fairly low oil prices, a weak euro, and extremely low interest rates. The economic difficulties in major emerging markets are restraining achievable German growth momentum at present, but are most unlikely to derail the upswing as such. The Volkswagen scandal has left no negative macroeconomic trace as yet, and implications of the refugee crisis are likely net positive in the near-term anyway, as credit-financed government consumption is being raised. German GDP growth is still expected to fluctuate around the 2% mark in annualized terms during the coming quarters.
The latest IHS forecast for annual average GDP growth in 2015 is 1.7%, up from 1.6% in 2014. This refers to calendar-adjusted data – the 2015 forecast in non-adjusted terms is in fact even 1.9%. German consumer demand has been growing at a pace of around 0.5% q/q since mid-2014 and should maintain this momentum during the second half of 2015 despite the setback to only 0.2% q/q in Q2, which we would regard as an outlier. 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. For 2016, our current GDP growth forecast is 2.1%, which translates to 2.2% in non-adjusted terms.
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