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Economy in Brief

IFO Stabilizes at Low Level
by Robert Brusca  April 26, 2022

Germany's IFO index stabilized in April at a low level. The industry readings have been weakening and fell sharply in March with the climate index falling to minus 6.5 from 15.8 in February, the current index falling to 24.1 from a February reading of 30.5 and with expectations falling extremely sharply to -32.9 in March from plus 1.9 in February. In this month's report, in April we see for the most part slight rebounds in these same IFO readings. Compared to March, the climate index is at minus 6.1, a few ticks higher than the minus 6.5 reading from March. The current business index contrarily is weaker falling to 20.7 from 24.1 in March. Business expectations tick slightly higher to -29.6 from -32.9 in March.

April is more of a period of consolidation compared to March when there were weaknesses across the board largely the result of war beginning in late-February between Russia and Ukraine. However, in April, it's hard to say that the shift in conditions creates much optimism. The drop off experienced in March is still largely in place and the levels of the readings of the various metrics range from ‘firm' to ‘extremely weak,' with emphasis in the range of ‘weak to very weak' for the most part.

The all-sector climate index, for example, is at a 14.6 percentile standing on data since late-1991. Current conditions have a standing at their 37.6 percentile, a higher standing than for climate, but still well below the median reading which occurs at a standing at the 50th percentile. Expectations have a 5.9 percentile standing; expectations are among the 6% lowest of all readings on this timeline.

The sectors in the IFO show climate ratings on their April values that range from a high at the 20.5 percentile in manufacturing to a low at the 7.8 percentile in retailing – weak readings all.

Current conditions show rankings that are a little more clustered and moderate with some readings that are even characterizable as ‘firm.' Wholesaling, for example, has a 79-percentile standing; construction has a 68.8-percentile standing; manufacturing is right near its median with a 50.7-percentile standing. However, retailing and services have standings around their 30th percentile within the lower 1/3 of their respective distributions of values.

Expectations, however, have collapsed. They are uniformly bleak. Construction, for example, gives us the lowest reading that we've seen on this timeline; the highest reading for any sector is from manufacturing at an anemic 6.8 percentile standing. The rest of the values are sandwiched between those two values, marking all of them as extremely weak. Despite the weak readings for expectations, there were modest improvements in expectations month-to-month in all the sectors except construction and retailing.

It's not surprising that the German statistics show a shock decline because German policy has been forced to change 180 degrees in response to the Russian attack and invasion of Ukraine. For the longest time, Germany was in denial about the threat from Russia. German policy was geared to see Russia as a country with which Germany could do business and Germany did do business not only in trade but also in terms of having the economy plugged into the Russian oil pipelines. Several U.S. presidents tried to dissuade move Germany from this dependency on Russian oil and sought to improve Germany's contribution to NATO. Germany held fast to its views until the invasion of Ukraine revealed the Russians for the threat that they have always been. As a result of this, German policy and politics have been turned on their head. This is reflected in this series of shock changes in German economic measures and in business confidence. And the business of recoiling from this shock is only in progress; it is not over.

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