Summary: ifo business climate index declines in June, slightly less than expected; German economy having difficulty overcoming stagnation; current conditions index steady, expectations index down; German, French yields little changed; ANZ: dip in expectations first in five months, mainly concentrated in manufacturing; expectations index implies euro-zone GDP contraction of 0.7% in year to September.
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.
According to the latest report released by ifo, German business sentiment weakened further from its already-depressed level. June’s Business Climate Index posted a reading of 88.6, slightly below the generally expected figure of 89.3 as well as May’s final reading of 89.3. The average reading since January 2005 is just over 96.
“The German economy is having difficulty overcoming stagnation,” said Clemens Fuest, President of the ifo Institute.
German firms’ views of current conditions remained steady while their collective outlook deteriorated slightly. The current situation index was unchanged at 88.3 while the expectations index declined from 90.3 after revisions to 89.0.
German and French long-term bond yields were little changed on the day. By the close of business, the German 10-year yield had added 1bp to 2.41% while the French 10-year yield finished 1bp lower at 3.14%.
“The dip in expectations was the first in five months and mainly concentrated in the manufacturing sector,” said ANZ economist Madeline Dunk. “It is possible that the earlier EU announced tariffs on EVs from China may have weighed on sentiment.”
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. June’s expectations index implies a 0.7% year-on-year GDP contraction to the end of September.
