Summary: ifo business climate index down again in September, slightly below expectations; companies’ outlook for coming months continues to decline; current conditions, expectations indices both down; German, French yields decline; ANZ: highlights sluggish growth outlook for largest economy in euro area; expectations index implies euro-zone GDP contraction of 1.4% in year to December.
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 and stagnating through 2023 and the first half of 2024.
According to the latest report released by ifo, German business sentiment has weakened further from its already-depressed level. September’s Business Climate Index posted a reading of 85.4, slightly below the generally expected figure of 86.0 as well as August’s final reading of 86.6. The average reading since January 2005 is just over 96.
“Sentiment has once again deteriorated at companies in Germany,” said Clemens Fuest, President of the ifo Institute. “The companies were particularly less satisfied with the current business situation. The outlook for the coming months continues to decline. The German economy is coming under ever-increasing pressure.”
German firms’ views of current conditions and the outlook both deteriorated. The current situation index declined from 86.6 to 85.4 while the expectations index fell from 86.4 after revisions to 84.4.
German and French long-term bond yields both decreased modestly on the day. By the close of business, the German 10-year bond yield had slipped 1bp to 2.14% while the French 10-year yield finished 2bps lower at 2.91%.
“The IFO business climate index and the PMI report, released a day before, highlight sluggish growth outlook for the largest economy in the euro area,” said ANZ economist Kishti Sen. “Slowing inflation and weakness in growth outlook highlights the need for easing of policy.”
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 three months. September’s expectations index implies a 1.4% year-on-year GDP contraction to the end of December.
