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Economy in Brief

German IFO Survey Keeps Pointing Lower
by Robert Brusca  October 21, 2011

The German IFO survey is showing a great deal of stress as expectations have slid well into the lower portion of their range. The expectations diffusion reading lies at the boundary of the lower 25th percentile of its historic queue of ranked observations. It is weaker than this only 25% of the time. That is a sour reading.

But the current reading tells us why Germany is not gnashing its teeth. It has concerns about the future but its current index is at the boundary of its top ten percent of its queue (89.6%). For the time being Germany is doing very well in real time.

In these respects Germany is a very rare EMU member. Most are doing much worse currently and are as worried if not more worried about the future.

The IFO shows us that in October the Economic Climate fell in all sectors except services where the sector index rose by nearly one point (+0.9) from 16.5 to 17.4. Still, services is the sector with the second lowest relative queue standing. Its raw value for the month of October at +17.4 is head and shoulders above all other sectors with manufacturing at 9.7 being the next strongest. But its standing in its historic queue of value is only in the 69th percentile. Only MFG is weaker in the 64th percentile of this queue. These two sectors tend to have high raw readings, they tend to expand. So while the raw readings are high compared to other sectors, by a different comparison, with their own past history, these are not good readings. Oddly construction at -13 is in the 93rd percentile of its queue, just a reminder of how weak that sector has been, that a negative reading could be such a strong position in historic comparison....Wholesaling and retailing are in the 83rd and 91st percentiles of their respective queues.

Germany, while still firing on all cylinders, currently is facing challenges. The low expectations readings suggest that there could be a severe fall in the future but if the Euro-Area gets its act together expectations could re-group and the current situation may be somewhat better protected.

That seems a possibility, but German will still face harsher times ahead. Even if Europe gets its house in order there is a lot of weakness surrounding Germany and that is not going to be brushed away. If Greece does not fall into an uncontrolled spiral the good news is that it won’t drag other countries with it but many in the Zone still face some severe issues and the prospect of continued weakness and even negative growth.

The IFO survey only shows us that Germany has been slow in succumbing to the pressures around it in the Zone. The current index reached a peak of 21.9 in March and moved sideways posting a 20.8 as late as June of this year despite unfolding Euro-Area problems. In July it slipped to 17.8 and after that the weakness was severe as the current IFO index dropped to 9.8 in August, 7.5 in Sept, and now 5.4 in October. The real mark down came in August; since then there has been some continued ‘slow’ erosion from that vastly reduced level.

IFO expectations peaked in this cycle at 17.5 in February. They then fell by 2.5 to 4 points per month until August when the reading fell from +6.0 to -3.6. But since then, the erosion has continued to be measured, as it was before. There is no panic despite the low expectations reading. Still, month by month Germans see prospects worsening slightly. The high current reading may keep Germany from plunging into recession if things go wrong in the Zone; but its period of downshifting and the scope for the downshift are still considerable risks.

Whatever is done to save the Zone or to deal with it will have consequences. How those consequences will fall across countries and if the Zone will survive intact all are factors that will determine which countries have the most to lose and gain. For now everyone seems to be at risk. The IFO survey recognizes the risk to the German economy, the strongest economy in the Zone.

The chart plots the IFO indices while the table produces the sector diffusion readings.

Summary of IFO Sector Diffusion Readings: CLIMATE
Climate Curr Last Mo Since Jan 1991* Standings
Avg Median Max Min Range %Range Queue or
All Sectors 5.4 7.4 -6.4 -7.2 22.7 -36.7 59.4 70.9% 81.0%
MFG 9.7 10.5 1.4 3.8 30.4 -43.2 73.6 71.9% 64.9%
Construction -13.6 -10.0 -28.7 -29.4 -0.8 -49.6 48.8 73.8% 90.0%
Wholesale 6.3 13.0 -11.1 -13.8 27.3 -38.7 66.0 68.2% 83.1%
Retail 2.0 2.9 -15.7 -16.2 23.9 -41.8 65.7 66.7% 91.3%
Services 17.4 16.5 14.6 17.7 33.0 -14.5 47.5 67.2% 69.1%
Current cond: All 21.4 23.7 -6.6 -9.9 33.8 -38.8 72.6 82.9% 89.6%
Expectations: All -9.4 -7.6 -2.8 -1.4 17.5 -45.8 63.3 57.5% 25.5%
* June 2001 for Services
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