Summary: ifo business climate index falls in May, below expected figure; German firms “sceptical” about upcoming summer; current conditions index, expectations index both down; expectations index implies euro-zone GDP contraction of 1.3% 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. 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 had its first setback after increasing for the previous six months. May’s Business Climate Index recorded a reading of 91.7, below the generally expected figure of 93.0 as well as April’s final reading of 93.4. The average reading since January 2005 is just under 97.
“German companies are sceptical about the upcoming summer,” said Clemens Fuest, President of the ifo Institute.
German firms’ views of current conditions and their collective outlook both deteriorated. The current situation index slipped from April’s figure of 95.1 to 94.8 while the expectations index decreased from 91.7 after revisions to 88.6.
German and French long-term bond yields barely moved on the day. By the close of business, the German 10-year bund yield had slipped 1bp to 2.46% while the French 10-year OAT yield finished unchanged at 3.04%.
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 1.3% year-on-year GDP contraction to the end of August.
