IHS: German Ifo business climate index increases to second-highest
level since mid-2014 in June, separate services survey rebounds
Frankfurt/Main (26.6.16) – In June, the headline Ifo business climate index reflecting conditions in industry, construction, and wholesale and retail trade increased anew from 107.8 to 108.7. This is up from February’s 14-month low of 105.8, clearly exceeds its long-term average of 101.7, and only just misses last November’s interim peak of 109.0. Indeed, apart from the latter, the latest Ifo index level is the highest since mid-2014. Historic extremes are a low of 83.5 in March 2009 in the wake of the Lehman collapse and an all-time peak of 114.3 in November/December 2010. The recent rebound of the Ifo index, with expectations improving throughout March-June, corroborates the impression of recently strengthening German economic growth momentum. The Ifo evidence is also consistent with improvements of the PMI and ZEW leading indicators since March. The Ifo institute comment on the latest data by saying that “in the run-up to the Brexit referendum” Germany’s industrial climate has improved once again, adding that the upswing of the German economy remains intact.
The expectations component of the Ifo business climate survey improved for the fourth month in a row, increasing from 101.7 to a six-month high of 103.1. Companies have apparently adjusted to the economic problems and in part enhanced geopolitical instability observed in many emerging markets (including China). The level of 103.1 now clearly exceeds the long-term average of 100.3 and approaches the November 2015 interim high of 104.7. Back in 2014, the expectations sub-index had shown a similar and even longer period of temporary deterioration, then slipping from a 35-month high of 108.2 in January to 99.3 in October 2014 before recovering. Meanwhile, June’s current conditions component increased only slightly from 114.2 to a ten-month high of 114.5, but this is already very close to the interim peaks of 115.1 in August 2015 and 115.4 in March 2014. The current conditions sub-index is far above its long-term average (103.2), as is also underscored by the fact that the most recent downward correction of some length (during April-October 2014) only extended to 108.2, never even getting close to its long-term average. The all-time record of 122.2 seen in June 2011 is not in danger any time soon, however, especially given the Brexit event that is clouding European economic prospects now.
Today’s separate Ifo survey release about the climate in the service sector – a series available since January 2005 – has posted a fresh rebound, continuing the recent zigzag course. Having declined from an all-time high of 34.4 in December 2015 to an 11-month low of 24.6 in March, the headline services index has now increased from May’s 25.1 to 27.2 in June. The rebound in June was driven by both current conditions (from 37.6 to 40.6) and expectations (from 13.3 to 14.4). The latter, which had reached an all-time peak of 26.3 in November 2015 before weakening to 13.1 in March, has thus stabilized during the second quarter. Current conditions, which had deteriorated to a relatively smaller extent in early 2016 (from 44.7 in December to 36.7 in March), have even recouped half those losses now. Expectations and current conditions both remain above their long-term averages of 11.0 and 23.5, respectively. The bigger picture reveals that the overall service-sector index unwound the break-out to the upside observed in the second half of 2015 during Q1 2016, but has now stabilized at levels that exceed most of what was observed between the start of this series in 2005 and 2014. During the eleven years of history of this service sector series, expectations have fluctuated between -25.5 (December 2008) and 26.3 (November 2015), and current conditions between -12.9 (May 2009) and 45.0 (September 2015).
Meanwhile, the breakdown of the main Ifo survey by sector, relating to goods production and trade, shows widespread improvements. The only exception is retail sales, which had shown the largest gain of all sectors in May. This downward correction was largely due to current conditions, though it should be noted that these are still at historically elevated levels, owing to persistently favourable real income developments. Elsewhere, current conditions generally improved. Next to wholesale trade, this pertains particularly to the construction sector, which reached yet another (post-unification) all-time high with respect to both current conditions and its total index. The business climate in the manufacturing sector increased for the fourth consecutive month, this time driven mostly by expectations and by consumer goods producers (in May it had been firms producing investment goods). That said, more than a third of surveyed industrial firms feared negative consequences of an exit of the UK from the EU.
Overall, the June Ifo business climate report would normally point to strengthening economic growth during the second half of 2016. However, the Brexit decision overnight has now seriously clouded the near-term outlook, notwithstanding the fact that Germany’s current economic upswing is more domestically rather than externally driven (construction, private consumption, equipment spending). This is because the UK’s decision to turn away from the EU has global implications and will therefore dampen Germany’s export prospects generally – even if a weaker euro partly compensates. The Ifo service-sector index may be less affected than the industrial and trade sector related index by this anticipated setback. Furthermore, the near-term impact of the refugee crisis on the economy will remain positive, as government consumption is being raised currently (enabled by budget surpluses).
The June IHS forecasts for annual average GDP growth in 2016 and 2017 have been kept at 1.9% and 2.0% (calendar-adjusted), respectively, following 1.4% in 2015. Although German consumer demand will continue to be supported in the coming months by high nominal and – given near-zero inflation – real wage growth, ongoing employment gains, and extremely low interest rates that discourage saving, the dampening effects of the Brexit are likely to necessitate a toning down of these predictions to the 1.5% area for 2016 and probably only modestly above the 1% level in 2017, however.
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