IHS Global: German Ifo business climate data extend September rebound in October as
expectations continue to lead the way
Frankfurt/Main (25.10.16) – In October, the headline Ifo business climate index reflecting conditions in industry, construction, and wholesale and retail trade built on September’s remarkable recovery, increasing further from 109.5 to a 30-month high of 110.5. 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 114.3 in November/December 2010. The additional improvement in October is in line with latest PMI developments. The Ifo institute comment on the latest data by saying that the German economic recovery “is gaining pace”.
The expectations component of the Ifo business climate survey was the driving factor once again, rising from 104.5 to 106.1. This is a 30-month high that exceeds its long-term average of 100.4 by a sizeable margin now. Meanwhile, current conditions improved only slightly from 114.7 to 115.0, but this is also a 30-month high that beats its own long-term average of 103.3 by even more than expectations. It should be kept in mind that even the latest downward correction of some length (during April-October 2014) only extended to 108.3, never even getting close to its long-term average. On the other hand, the all-time record of 121.9 seen in June 2011 should not be at risk in the foreseeable future due to the high levels of international political uncertainty at present (including the Brexit, the unstable situation in the Middle East and Turkey, and the imminent US elections).
The separate Ifo survey release about the climate in the service sector – a series available since January 2005 – reveals a slight downward correction after the August-September rebound observed since June, but levels remain historically high. The headline indicator slipped from 32.3 to 32.1, staying fairly close to the all-time high of 34.8 of December 2015. Furthermore, while current conditions declined from 40.0 to 39.5, expectations posted their fifth increase in succession from 24.7 to an 11-month high of 24.9. The latter is close to the all-time peak of 26.2 of November 2015, contrasting sharply with an interim low of 13.2 recorded as recently as in May. Current conditions, which had deteriorated by a much more limited amount in early 2016 (from 45.7 in December to 37.2 in March), have accordingly rebounded in a more restrained fashion in recent months. In any case, expectations and current conditions remain well above their long-term averages of 11.3 and 24.0, respectively. The bigger picture 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 since recovered anew. During the almost twelve years of history of this service sector series, expectations have fluctuated between -25.6 (December 2008) and 26.2 (November 2015), and current conditions between -11.8 (May 2009) and 45.7 (December 2015).
Meanwhile, the breakdown of the main Ifo survey by sector, relating to goods production and trade, reveals that – as in September – manufacturing led the way, driven by expectations (best level in over two years) but also helped by improving current conditions. The Ifo institute did not comment about export performance, but they emphasized that investment goods were in particularly high demand, a sector of production that German exporters are best known for. The construction sector established yet another post-unification all-time high despite a moderate downward correction of current conditions – expectations therefore improved all the more. By contrast, the business climate slipped moderately among wholesalers and marginally in the retail sector. In wholesale trade, both current conditions and expectations deteriorated, partially unwinding September’s gains, whereas the decline among retailers was entirely due to a modest downward correction of current conditions while expectations recovered further from the sharp dip in August.
Overall, the October Ifo business climate report corroborates the view that German growth will accelerate appreciably during the final months of 2016. The knee-jerk downward correction triggered by the Brexit vote has been fully overcome, partly due to the realization that the bulk of the likely deterioration in EU-UK trade will probably only occur after the exit now expected for 2019. This corroborates the encouraging evidence from German manufacturing PMI data recently, which includes the highest export order levels in over two years. Following the marked recovery of the headline business activity index of the service-sector PMI survey in October, this is now back in line with the services part of the Ifo survey, October results of which should be characterized as stabilization at high levels. Germany’s current economic upswing is more domestically driven than in past cycles (owing to construction, private consumption, and equipment spending), but prospects for exports are now brightening as well. Meanwhile, the near-term impact of the refugee crisis on the economy will remain positive, as government consumption and investment is being raised, enabled by budget surpluses.
The October IHS forecasts for (calendar-adjusted) GDP growth in 2016 and 2017 were kept at 1.8% and 1.7%, respectively, having been raised in August from July’s 1.6% and 1.4% when the near-term Brexit impact turned out to be less severe than initially feared. Today’s Ifo data suggests that the anticipated acceleration of growth in the final quarter of 2016 could even push average growth in 2017 close to the 2% level. The bias for any future forecast revisions is certainly to the upside.
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