ifo business climate index rises in October, above expected figure; managers less pessimistic in view of coming months; current conditions index up, expectations index up; German, French 10-year yields higher; NAB: slightly more optimistic picture than advance PMIs; expectations index implies euro-zone GDP contraction of 2.1% in year to January.
Following recessions in euro-zone economies in 2009/2010, the ifo Institute’s Business Climate Index largely ignored the European debt-crisis of 2010-2012, mostly posting average-to-elevated readings through to early-2020. However, the index was quick to react in the March 2020 survey, falling precipitously before recovering quickly in subsequent months. Readings through much of 2021 generally fluctuated around the long-term average before dropping away in 2022.
According to the latest report released by ifo, German business sentiment has improved after five consecutive months of decline. October’s Business Climate Index recorded a reading of 86.9, above the generally expected figure of 86.0 as well as September’s final reading of 85.8. The average reading since January 2005 is 96.5.
“Companies are somewhat more satisfied with their current business,” said Clemens Fuest, President of the ifo Institute. “In addition, managers were less pessimistic in their view of the coming months. Germany’s economy can see a silver lining ahead.”
German firms’ views of current conditions and their collective outlook both improved. The current situation index increased from September’s figure of 88.7 to 89.2 while the expectations index crept up from 83.1 after revisions to 84.7.
German and French long-term bond yields finished higher on the day. By the close of business, the German 10-year yield had gained 8bps to 2.90% while the French 10-year OAT yield finished 4bps higher at 3.53%.
“This paints a slightly more optimistic picture than the advance PMIs, released earlier in the week, where the composite index fell further into contractionary territory,” said NAB senior FX strategist Rodrigo Catril.
The ifo Institute’s business climate index is a composite index which combines German companies’ views of current conditions with their outlook for the next six months. It has similarities to consumer sentiment indices in the US such as the ones produced by The Conference Board and the University of Michigan.
It also displays a solid correlation with euro-zone GDP growth rates. However, the expectations index is a better predictor as it has a higher correlation when lagged by one quarter. October’s expectations index implies a 2.1% year-on-year GDP contraction to the end of January.
