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Economy in Brief

German IFO Expectations Turn Higher
by Robert Brusca  December 19, 2012

IFO expectations turned higher in December rising for the second month in a row and not falling for three-months in a row. Still, since September the current index has shed about three index points (out of approximately 110), But since October even the current reading has been nearly flat.

At 102.4 the climate reading is at its highest mark since July. Still, the index stood at 107.3 twelve months ago. The attached chart shows the nature of the rebound according to Climate, Current Conditions and Expectations indices. The rebound is both significant and short of decisive.

The sector diffusion indices in the table show that the MFG and Services sectors which are featured in the Markit framework are the weakest part of the German economy. The above display treats wholesaling and retailing as independent sectors split off from services. Markit also treats construction as a separate sector.

In December MFG climate gained to a net reading of -3.1 points from -6.5 in November. Services jumped to 14.1 from 8.5 in November. The services index has only made nine monthly jumps larger than this since mid-2001, this is a top 7% month change; Even so the level of the index in December is depressed with a queue standing of only 56.5% ( lower 56.5% of the time). Manufacturing's month to month bump is also relatively large; it is the 22nd largest rise in that same period making it a top 16% monthly jump. But the MFG index reading for December, however, is still weak with a queue standing at 31.6% (lower 31.6% of the time).

Construction remains the strong sector. It made only a small improvement in December but it sits strongly at the 93.5% mark of its queue and is stronger than its current reading less than 7% of the time.

Wholesaling and retailing both slipped in December. Wholesaling stands at the 75.3 percentile of its queue while retailing stands at the 82.7 percentile on its queue.

The IFO readings do not give us sector level observations of current conditions. But overall we can see that the current index has continued to fall in December. Attitudes are improving in Germany but the overall risks in the Zone and in the global economy are still there. However, the improvement in expectations is just what Chancellor Merkel has been trying to orchestrate by shifting her position to be more tolerant of Greece and its needs. She is up for re-election in 2013 and very much has been trying to manage the expectations and the perceptions of Germans. From the state of the IFO it looks like she is on the right track.

Summary of IFO Sector Diffusion Readings: CLIMATE Standings
CLIMATE Current Last Mo Since June 1991 Queue or
Dec-12 Nov-12 Avg Med Max Min Range % Range Rank
All Sectors -2.3 -4.1 -4.5 -5.3 22.2 -36.7 58.9 58.4% 58.4%
  MFG -3.1 -6.5 3.5 5.5 30.0 -43.8 73.8 55.1% 31.6%
  Construction -6.7 -7.5 -28.0 -29.0 3.4 -49.1 52.5 80.8% 93.5%
  Wholesale 3.7 5.0 -8.9 -12.6 27.0 -39.0 66.0 64.7% 75.3%
  Retail -1.4 -0.5 -14.9 -15.7 23.6 -41.6 65.2 61.7% 82.7%
  Services 14.1 8.5 10.9 10.5 33.0 -15.7 48.7 61.2% 56.5%
Current Conditions 3.1 5.0 -6.8 -9.0 33.7 -40.5 74.2 58.8% 72.5%
Expectations -7.7 -12.9 -3.4 -1.8 17.4 -45.5 62.9 60.1% 29.4%
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