Summary: ifo business climate index falls 1.3 points to 99.4 in August, below expected figure; expectations index down, current conditions index up; “significantly less optimism in companies’ expectations”, especially hospitality, tourism sectors; supply bottlenecks, infection rates placing strain on economy; expectations index implies euro-zone growth of 0.8% in year-to-November.
Following a recession in 2009/2010, the ifo Institute’s business climate index largely ignored the European debt-crisis of 2010-2012, remaining at average-to-elevated levels 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.
According to the latest figures released by the Institute, its business climate index fell to 99.4 in August. The reading was below the expected reading of 100.2 and 1.3 points below July’s final reading of 100.7. The average reading since January 2005 is just above 97.
“This decline was due mainly to significantly less optimism in companies’ expectations. Concerns are growing in the hospitality and tourism sectors in particular,” said Clemens Fuest, the president of the ifo Institute. He pointed to supply bottlenecks for intermediate products and concerns regarding infection rates as placing “a strain” on Germany’s economy.
The expectations index decreased from July’s revised figure of 101.0 to 97.5, also below the generally-expected figure of 100.0. The current situation index increased from 100.4 to 101.4.
German and French long-term bond yields both increased moderately on the day. By the close of business, German and French 10-year yields had each gained 5bps to -0.42% and -0.07% 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. August’s expectations index implies a 0.8% year-on-year growth rate to the end of November.
