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Economy in Brief

German Business Confidence Continues to Erode 
by Louise Curley September 25, 2007

The IFO's headline series on the business climate in Germany's manufacturing, construction and trade industries continues to erode. Since April of this year the diffusion index, which measures the excess of optimists over pessimists, has declined from 16.3% to 7.6% in September. By September pessimists outweighed optimists by 20.7% in the construction industry and by 12.9% in retail trade. Although the excess of optimists over pessimists in manufacturing has been declining, it was still a positive 18.2% in September. In wholesale trade, the excess of optimists actually increased to 10.7% in September from 8.1% in August. The diffusion indexes for the business climate in the four industries are shown in the first chart.

The second chart shows the diffusion indexes for the current situation in these industries. As of now, data are available only through August. At that time participants in the survey engaged in manufacturing, construction and retail trade saw improvement in their current conditions. As for expectations for the six months ahead, which, again, are available only through August, it was only those engaged in wholesale trade who looked for an improvement, as can be seen in the third chart.

The IFO has been publishing data on the service industry since May, 2001. (The industrial data go back to January, 1991.) The survey in the services is based on about 2,000 responses of firms in important, especially business-oriented segments of the tertiary sector (excl. distribution, financial services, leasing, insurance and government. These data have not been seasonally adjusted, nor have they been incorporated into the headline business climate measures. Diffusion indexes are available for the business climate, current conditions and expectations for the service industry. These are shown in the fourth chart. The appraisal of current conditions in the service industries improved in September, but the diffusion indexes for expectations and the overall climate declined. In general, the diffusion indexes for the business climate, current conditions, and expectations for the service industry tend to be higher than those for the manufacturing and trade industries.

GERMAN IFO BUSINESS SURVEY DIFFUSION INDEXES (% BALANCE) Sep 07 Aug  07  Jul  07  Jun 07  May 07  Apr 07
Business Climate (Headline Series) 7.6 10.7 12.0 13.1 16.2 16.3
  Manufacturing 18.2 21.5 23.4 23.8 27.5 27.1
  Construction -20.7 -17.5 -15.3 -16.1 -14.7 -14.0
  Wholesale Trade 10.7 8.1 8.0 14.1 18.3 17.1
  Retail Trade -12.9 -4.3 -5.5 -5.1 -3.2 -0.5
  Business Climate 20.8 21.5 22.0 26.0 26.5 28.5
  Current Conditions 30.0 26.0 26.0 28.0 29.0 31.0
  Expectations 12.0 17.0 18.0 24.0 24.0 26.0
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