German Business Confidence Measure (IFO) Surprises on the Up Side

The IFO's overall measure of business confidence in Germany, the Business Climate Index, rose unexpectedly in September to 96.0 (2000=100) from 94.6 in August. Most analysts had expected the index to weaken in view of the spike in energy prices and the indecisive results of the September 18th election. Indeed the I FO reported that the 20 percent of the replies received after the election were more pessimistic than those received earlier. In addition, the ZEW measure of business confidence, published last week, had shown a drop to 38.6% in September in the balance of those expecting conditions to be better in the next six months and those expecting conditions to be worse from 50.0% in August.

The ZEW measure is frequently a good predictor of the IFO measure, but by no means a sure fire one as indicated by the degree of correlation (R) between the two series, which is 69%. The R-Squared, which measures the degree to which variations in one variable explain variations in the other is only 48%. The first chart shows the ZEW percentage balance between those expecting better conditions in the next six months and those expecting worse conditions and the IFO diffusion index for expectations of conditions six month ahead.

The rise in confidence in the IFO measure was due largely to the respondents' appraisal of current conditions with the index rising 2.77% from 93.8 in August to 96.4 in September. The rise in expectations for the economy six month ahead was only one-tenth of one percent. The indexes of current conditions and expectations of conditions six month ahead are shown in the second chart. Much of the satisfaction with current conditions has been attributed to the decline in the Euro. The Euro averaged around 1.22 to the dollar during the survey period, down from 1.36 at the end of 2004.