Summary: ifo business climate index up in May; above expected figure; current conditions index up, expectations index essentially steady; “no observable signs of recession”; expectations index implies euro-zone GDP contraction of 4.0% in year to August 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. Readings through much of 2021 generally fluctuated around the long-term average.
According to the latest report released by ifo, German business sentiment has improved a touch, albeit at a low level. May’s Business Climate Index recorded a reading of 93.0, above the consensus expectation of 91.0 and April’s final reading of 91.9. The average reading since January 2005 is just above 97.
“There are currently no observable signs of a recession,” said Clemens Fuest, President of the ifo Institute. He noted German companies were “much more satisfied with their current business” but remained “sceptical” of the outlook.
German firms’ views of current conditions improved while their collective outlook remained almost unchanged. The current situation index increased from April’s revised figure of 97.3 to 99.5 while the expectations index crept up from 86.8 to 86.9.
German and French long-term bond yields both rose noticeably on the day. By the close of business, the German 10-year bund rate had gained 7bps to 1.01% while the French 10-year OAT yield finished 6bps higher at 1.53%.
NAB economist Taylor Nugent noted the rise in the current conditions index presented “a picture of resilience rather than recession” but the expectations index “mired around 86.9 reminds of the significant headwinds still in play.” 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 4.0% year-on-year contraction in GDP to the end of August 2022.
