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Economy in Brief

German IFO Tails Off in August -Raises Questions
by Robert Brusca  August 25, 2021

The IFO report shows assessments across five industry segments as well as across three functional environmental measures: (1) climate, (2) current conditions, and (3) expectations. There is also a total index for each functional measure therefore 18 readings in all: five industries plus a total across three functional environmental measures. In August, only 5 of 18 of these metrics rose month-to-month. That's a poor record.

Has there been recovery?
Despite the broad monthly setback, comparison with January 2020, a month before the virus began to appear, shows that most of the industries on most of the environments are higher today than in January 2020. The clear exception is construction, an industry that is weaker than its January 2020 level on all three environmental measures. Services is a partial exception as it is lower on the current metric, and it is also lower on the climate metric despite a solid net gain in expectations. This comparison with January 2020 gets less and less meaningful over time since we are now 19 months past January 2020 and merely 'getting back to' that level after 19 months is not impressive. The average gain in the three environments across all sectors from January 2020 to date is 10.8 points. That gain is mostly due to the 26.7-point average gain in manufacturing. It is followed by an 11.2-point average 3-environment gain in wholesaling. Retail makes an average gain of just 0.8-points while the service sector has a net drop of -1.9-points and construction an average decline of -5.7-points. Clearly the sense of recovery from 2020 remains uneven and some industries can be seen to have not grown at all: construction, services, and retailing.

Month-to-month changes
Month-to-month climate backtracked in every sector except construction. The biggest backtracking was in retailing followed by wholesaling. The all-sector climate gauge lost about three points month-to-month while the current conditions all-sector metric gained about two points and expectations lost more than seven points.

Looking at individual industries, current conditions fell the most in wholesaling followed by retailing; there was a one-point decline in manufacturing. Construction improved in the current environment and services leapt ahead, gaining over 4.5 points.

Expectations weakened sharply month-to-month as retailing shed over 10 points month-to-month, services shed more than 8.5 points, wholesaling shed nearly 7 points and manufacturing shed over 5 points. Only construction gained month-to-month rising by less than 3 points.

The virus plays its hand
Expectations were walloped hard in August as the virus spread and as concern over reinfections spread and calls for a booster shot gained traction. Calls for a booster are opposed by WHO since it wants more of the world's population to get a first-round inoculation before the developed countries queue up a second round for boosters. The vaccine ante was upped a bit as the FDA in the U.S. gave full approval to Pfizer taking its vaccine off the EUA authorization. This FDA approval should change the vaccine game at least in the U.S. although many other global health authorities will take their cue from this decision. With a vaccine approved, people can more easily be forced to take it. Some may be more apt to take it voluntarily because it is not fully certified. Vaccine hesitancy has become an issue with the more highly transmissible Delta variant. The more transmissible a variant, the larger the proportion of the population that must be vaccinated to blunt its spread. A recent Israeli study showing that the vaccine's efficacy decays over time, that there are reinfections, and that reinfected people can spread the virus have been the reason for the recent increase in virus concerns having a larger impact on economic activity.

An historic perspective on where these industries stand
Turning back to Germany's expectations, three of the net diffusion gauges have outright negative readings in August: retail, construction, and wholesale.

Ranking the August data on a timeline back to January 2005, all expectations measures except manufacturing have readings below their period medians. At 57%, manufacturing has the strongest standing. At 29%, retailing has the lowest standing, but it has a lot of clustered company from wholesaling and construction and bit stronger but still very weak, services sector.

In contrast, current conditions standings are quite high with two industries in their 90th percentiles (retailing and wholesaling), two in their 80th percentiles (manufacturing and construction) and only services weak and well below its median at a 34-percentile standing.

Climate shows some firmness, some ordinariness and some weakness. Manufacturing and construction have sector standings just below the 80th percentile. Wholesaling and retailing are in the bottom and the top of the sixtieth percentile range. The service sector has a climate reading in its 29.5 percentile – the lower one third of its queue of values and well below its median.

Summing up
On balance, it is a weak report from the IFO and it is disappointing and somewhat worrying. It is the virus at work, again. And concerns about infection are spreading. The virus is generally not as dangerous as its earlier variants, but it is more transmissible, and it can create enough health issues to put people in the hospital and to strain emergency room resources. There is no point to soft-pedaling the risk, but the risk of death and of severe infection is lower than it was with earlier strains of the virus. Still, this 'wave' is again changing behavior prompting more social distancing and more mask wearing and more restriction of movement. As such, it poses a challenge to economic growth. Some are saying that this variant is now near its infectious peak and will soon slide down the scale. That would be good news, but we have yet to see it. We may still be at risk to new more vaccine evasive variants as well. At this point, we just do not know what is next. We are not on the smooth glide path to growth that had been expected after the vaccines were launched; that's for sure.

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