Summary: ifo business climate index up in February, slightly above expected figure; German economy emerging from period of weakness; current conditions index down a touch, expectations index up; expectations index still implies euro-zone GDP contraction of 3.7% in year to May.
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 fourth consecutive month, albeit to a still-depressed level. February’s Business Climate Index recorded a reading of 91.1, a little higher than the generally expected figure of 90.7 as well as January’s final reading of 90.1. The average reading since January 2005 is just under 97.
“Expectations in particular were brighter,” said Clemens Fuest, President of the ifo Institute. ”However, assessments of the current situation were slightly less good. The German economy is gradually working its way out of a period of weakness.”
German firms’ views of current conditions deteriorated a touch while their outlooks improved. The current situation index declined from January’s figure of 94.1 to 93.9 while the expectations index increased from 86.4 after revisions to 88.5.
German and French long-term bond yields both fell modestly on the day. By the close of business, German and French 10-year bond yields had both lost 2bps to 2.53% and 3.00% respectively.
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 3.7% year-on-year GDP contraction to the end of May.
