German Ifo Business Climate Index Approaches Balance in December as Business Confidence Improves

Business is looking better in Germany. Just three days ago, Louise Curley discussed the ZEW Investor Survey, which showed a surprising gain. Now we have the parallel business confidence data compiled by Ifo, a German economic research institute, from a survey of 7,000 business firms in manufacturing, construction and trade. This survey, too, as the ZEW, turned in a favorable performance for December, better than market expectations. The "Business Climate Index" is 99.6 (2000=100), with the component "Business Situation" and Business Expectations also both at 99.6. All three indicators improved from 97.8 in November. The improvement was shared by all major industry segments in the survey, manufacturing, construction, wholesale and retail trade.

Accompanying these indexes are diffusion measures showing the balance of better and worse conditions. These diffusion gauges have generally been negative, that is, more business managers continue to experience deterioration than growth. Still, there is considerably less deterioration than in the recent past. The overall business climate gauge is -1.7% in December, its best level since August 2000 and up from -14.9% last May. Current conditions are -6.0%, the best since January 2001 and much better than April's -18.7%. Expectations are +2.6. This last, reflecting business leaders' persistent hopes for better times, has frequently been positive, most recently in late 2003 and early 2004.

These improvements seem stronger than some views expressed recently -- prompted perhaps by the riots in neighboring France, by recent political uncertainty and by high energy costs -- that Germany is mired in a distressing economic morass. But the upturns in these confidence measures began about mid-year and survived all those negative weights on the economy. Offsetting these factors has been the weaker euro and commensurate advance in German competitiveness. Further, even employment has been increasing. Since bottoming in April, employment has risen 164,000 and the locally defined unemployment rate has eased from 12.0% in March to 11.5% in November, still high but well below the peak. Thus, the German economy looks better, and this week investors in the ZEW survey and business leaders in the Ifo poll have agreed with that perspective.