Summary: ifo business climate index up 2.9 to 98.9 in February, above expected figure; expectations, current conditions indices both up; German betting on end of coronavirus crisis; expectations index implies euro-zone GDP expansion of 1.4% in year to May 2022.
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. The rebound which began in May of that year was almost as sharp but it was also characterised by a period of below-average readings which lasted until early 2021. Readings through the remainder of that year generally fluctuated around the long-term average.
According to the latest report released by ifo, German business sentiment has improved. February’s Business Climate Index recorded a reading of 98.9, above the expected reading of 96.4 as well as January’s final reading of 96.0. The average reading since January 2005 is just above 97.
“Companies were more satisfied with their current business. There was a marked improvement in expectations. The German economy is betting on an end to the coronavirus crisis,” said Clemens Fuest, President of the ifo Institute. The Ukrainian situation “remains a risk factor,” he added.
German firms’ views of current conditions and the outlook both improved. The expectations index increased from January’s revised figure of 95.8 to 99.2 while the current situation index rose from 96.2 to 99.2.
German and French long-term bond yields increased modestly on the day. By the close of business, the German 10-year bund rate had gained 3bps to 0.23% while the French 10-year OAT yield finished 1bp higher at 0.72%.
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. February’s expectations index implies a 1.7% year-on-year expansion in GDP to the end of May 2022.
