Summary: ifo business climate index up in March, above expected figure; German economy stabilizing; supply chain bottlenecks dissipating; current conditions index, expectations index both up; expectations index still implies euro-zone GDP contraction of 2.7% in year to June.
Following a recession 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. 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 for a fifth consecutive month, albeit to a lower-than-average level. March’s Business Climate Index recorded a reading of 93.3, higher than the generally expected figure of 91.0 and February’s final reading of 91.1. The average reading since January 2005 is just under 97.
“This upward development was driven primarily by business expectations; companies also assessed their current business as somewhat better,” said Clemens Fuest, President of the ifo Institute. “Despite turbulence at some international banks, the German economy is stabilising.”
German firms’ views of current conditions and their outlooks both improved. The current situation index increased from February’s figure of 93.9 to 95.4 while the expectations index increased from 88.4 after revisions to 91.2.
German and French long-term bond yields both increased markedly on the day as part of wider rise in advanced economy yields. By the close of business, the German 10-year bund yield had gained 10bps to 2.22% while the French 10-year OAT yield finished 11bps higher at 2.77%.
“Supply chain bottlenecks continue to dissipate, which is helping ease inflationary pressures,” noted ANZ senior economist Felicity Emmett.
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. March’s expectations index implies a 2.7% year-on-year GDP contraction to the end of June.
