Summary: ifo business climate index steady in May, slightly less than expected; German economy working its way out of crisis step by step; current conditions index down, expectations index up; German, French 10-year yields down; Westpac: result disappointing but encouraging improvement since start of 2024 preserved; expectations index implies euro-zone GDP contraction of 0.3% in year to August.
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 remained unchanged after three consecutive months of improvement. May’s Business Climate Index posted a reading of 89.3, slightly below the generally expected figure of 90.0 but in line with April’s final reading. The average reading since January 2005 is just over 96.
“The manufacturing, trade, and construction sectors are recovering, although the service sector took a slight hit,” said Clemens Fuest, President of the ifo Institute. “Germany’s economy is working its way out of the crisis step by step.”
German firms’ views of current conditions deteriorated while their collective outlook improved. The current situation index decreased from April’s figure of 88.9 to 88.3 while the expectations index increased from 89.7 after revisions to 90.4.
German and French long-term bond yields finished lower on the day. By the close of business, the German 10-year yield had lost 3bps to 2.55% while the French 10-year yield finished 4bps lower at 3.03%.
“Although the headline result disappointed, it’s encouraging that the improvement in sentiment over the start of 2024 has been preserved,” said Westpac economist Jameson Coombs.
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. May’s expectations index implies a 0.3% year-on-year GDP contraction to the end of August.
