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Economy in Brief

German IFO Index Slows Its Gain
by Robert Brusca  April 26, 2021

The German IFO gauge rose in April but its month-on-month gain slowed, improving by just 1.4 diffusion points. Current conditions gained on the month by 2.3 diffusion points and expectations gave back 1.6 points.

The climate gauge ranked on data since 1991 has a 77.8 percentile standing which tells us it has been stronger on this timeline less than 23% of the time. Current conditions have a 26.8 percentile standing while expectations have a 54.6 percentile standing. However, excluding the readings for manufacturing from the average, most of them drop sharply.

We do not see expectations busting out at the seams. The expectations series has run hot and cold since the Covid-19 virus struck. It posted three months in a row of positive readings after ending its string of deep negative readings in July 2020. Then it logged five negative readings in a row until the last two months where positive net expectations readings have emerged. March's month-to-month gain was large at +11.3 diffusion points. In April, that rate of improvement has slowed sharply. Germany and Europe continue to wrestle with the Covid-19 spread. The EC Commission that has been procuring vaccine for the euro area has just flipped the switch to sue AstraZeneca for breach of contract in providing vaccine to it.

Vaccine stories continue to permeate if not dominate global, not just European, or German, economic analysis. India is having terrible outbreaks. In the U.S. nationwide some degree of vaccination is in place for 42% of the population with 29% of the population fully vaccinated. Europe lags behind these parameters and has continued to have outbreaks. The impact on future activity as always is speculative. However, progress is being made even in Europe even though the progress is slow.

The IFO climate index is higher by 15.3 points from its value in January 2020 just before the virus stuck. However, current conditions are still 11.6 points lower; expectations are 16.3 diffusion points higher.

Sector stories
This month the sectors are the story- not the headlines. Manufacturing is the only sector with net gains compared to January 2020 for climate, current conditions and expectations. All of the net changes for manufacturing are strong with the expectations reading showing the biggest net increase among the three manufacturing readings.

There are two summary statistic metrics to consider in the table. The two far righthand columns provide the rank standings for the sectors on data back to 1991 and the change in diffusion indexes from January 2020. From these two columns, we get a look at the change in the sector from just before the virus struck and its current level evaluation compared to its own historic 'norms.' Except for manufacturing, the results overwhelmingly still are very weak. Construction and wholesaling manage to log firm standings for current conditions and moderately firm readings for climate. After that, all bets for strength are off the table.

Rank standings
Manufacturing followed by construction have the two highest readings for climate. Wholesaling also logs a reading above the 50-mark putting it above its historic median. Retailing and service sector climate readings post weak values well below their historic medians as sectors that the virus has hit hard and that require more face-to-face contact. Current conditions show the highest standings for construction and wholesaling followed by manufacturing. Retail and services languish with readings well below their respective medians (below 50%). Expectations standings show the 'rich getting richer' as manufacturing tops the list with a huge 95.9 percentile standing while all other sectors have expectations standings substantially below their respective historic medians. Virus uncertainty appears to be a significant factor across most of German industry with the lone exception of manufacturing.

Comparisons to pre-virus
Climate shows uneven readings by sector. There are net increases in the diffusion readings compared to January 2020 in place for manufacturing and wholesaling while construction, retail, and services each stand double digits below their diffusion levels of January 2020. Current conditions show net increases over January 2020 in double digits for manufacturing and by 4.6 diffusion points for construction while wholesaling, services, and retailing each slip in double digit shortfalls. Expectations show a huge gain for manufacturing since January 2020, a large decline for construction and decline for retailing. Wholesaling and services show some improvement from January 2020.

Summing up
On balance, the IFO aggregates are not as descriptive of the overall situation as they should be because manufacturing is so strong and it elevates the overall index implying a rosier view of other sectors. Manufacturing is clearly not representative of the overall IFO survey; performance outside manufacturing is for the most part very weak. The manufacturing responses are so strong in the various portions of the survey that they distort the averages. Be sure to look past the headlines of this report this month.

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