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Economy in Brief

IFO Weakness: A New Trend Lower or a ‘Mild’ Offset to a Spurious Jump?
by Robert Brusca April 24, 2008

Germany’s IFO index has dropped sharply in March to 102.4 from 104.8. Its current conditions index fell to 109.4 from 111.5. The April expectations index moved lower to 96.8 from 98.4. On a Yr/Yr basis the percentage declines in the IFO index accelerated for each of these components (see table below).

The readings for the IFO and its components are not yet dour, but they clearly have weakened and are no longer strong. The Business Climate index stands in the 73rd percentile of its range, a firm reading. The current situation is a bit better than that, lodged at its 78th percentile. Expectations, the forward-looking indicator, are weaker; still standing in the 60th percentile of their range. That is still above the midpoint but longer looking very strong and certainly losing momentum. Expectations readings, while above their range mid point stand at their period average at a value of 96.8.

The sector indices tell curious stories. Compared to their respective average values since January of 2001, all are still well above average. But all are not well-off. Retailing is the most curious having moved strongly higher earlier this year even as the euro was gaining in value. But in April it is falling sharply even as it was retaining some of those gains. The message from this sector is not clear. It resides in the 78th percentile of its range. In that respect it is the relative strongest of the sectors in its range since 2001. Wholesaling is the weakest sector residing in the 65th percentile of its range. MFG Construction and retailing are in the low seventieth percentiles of their respective ranges. All of them fell in the month, retailing fell the mostly sharply shedding 10 points in one month. Wholesaling lost over 6 points on its diffusion index. Manufacturing lost about four and one-half points.

It was not a good month for the IFO report that was generally worse than the Zew index has suggested. The IFO’s details are yet to be revealed. A MFG morale report from neighboring France, a fellow EMU member, (also released today) showed that French morale was off and that orders had dropped sharply. That result accords with the Belgian National Bank index released on Wednesday, just one day ago. We are getting confirming signs with similar causes about spreading weakness in the Euro Area. Even the UK’s CBI MFG survey showed a similar pattern of weakness made more nettlesome by reports that more firms were passing through price increases.

The reports for the EMU in the coming months are going to be important. On today’s weakness the Euro shed a large dollop of its recent outsized dollar gains. The ECB rhetoric about tightening rates has done a quick 180-degree turn, suddenly the IMF is pleased with the state of ECB policy and the ECB itself no longer seems to threaten a rate-hiking agenda.

What a difference a few bad economic reports can make. Stay tuned as we try to discern how weak things will get. For its part the German government has not cut its growth rate further for 2008 but has lowered the outlook for 2009. In the face of all the complaining that the euro is too strong, some of this is going have to undergo a credibility check. If the euro is far, far above parity (and seems to suggest that is so) then the recent strength in a number of euro indicators would seem to at risk. More weak readings from the IFO and its companion reports must lie ahead. All this talk of a resilient and robust economy in Europe surely must be about to go by the boards.

IFO Survey: Germany
  Percent: Yr/Yr INDEX NUMBERS
  Apr-08 Mar-08 Feb-08 Jan-08 Dec-07 CURRENT Average Percentile
Biz Climate -5.7% -2.7% -2.7% -4.2% -5.3% 102.4 96.0 73.1%
Current Situation -4.2% -0.7% -1.1% -4.3% -6.2% 108.4 95.2 78.6%
Biz Expectations -7.2% -4.7% -4.4% -4.1% -4.3% 96.8 96.8 60.5%
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