German IFO Gauge Shows Strong Ongoing Growth

The IFO ordinary indexes (see Chart) continue to climb in June. The ordinary IFO indexes (not the diffusion indexes) are at their highest marks since January 1991 for both the headline and the current index. The expectation index has been higher than its June value 14% of the time.

Diffusion indexes
The diffusion indexes (see Table) show that the sector and business situation indexes are at all-time highs on the same timeline as for the ordinary indexes pictured in the chart, back to 1991. As with the level-based indexes, expectations are not as strong as the other gauges. In diffusion terms, the expectation index has been higher 7% of the time. The various sector indexes are strong at their 97th queue percentiles or higher across the board. On a percentile of range basis, they are similarly strong with the exception that the retail sales sector resides in 'only' the 87.5 percentile of its historic range (high-low) of values. The range percentile readings evaluate the current index relative to its historic highs and lows. An 87 percentile standing tells you that the index is at the 87% mark of the high-low range with roughly 87% of the range below it and 13% above it. The percentile standings look at the current observation and evaluate it based on what proportion of the time it is lower or higher. On that basis, an 87 percentile standing implies that it is lower 87% of the time and higher about 13% of the time. The two gauges measure slightly different things and together they help to position the index with some historic perspective and serves to provide an image of sorts of where the index is positioned without looking at a graph.

In June, the IFO showed advances in all its diffusion indexes except construction. That index slipped to 12.4 in June from 12.8 in May. The manufacturing index barely notched a gain, rising to 26.1 from 26.0.

Among the ordinary index level indexes, the current situation index has the strongest year-on-year gain since July 2011 and the 34th strongest year-on-year gain back to January 1991. Since early-2013, the current index has been floating in and out of positive growth rates; there have been three episodes of negative year-on-year growth rates for the IFO current situation index. However, since late in 2016 the index has been rising steadily and accelerating steadily. The business climate index has had essentially companion cycles to the current index but in this episode it has already stopped accelerating. In the 2014 episode, both of these indicators accelerated then contracted. In 2013 the business climate index topped-out first as it is doing again this year, at least preliminarily. It's too early in the cycle to know if this is a topping signal or not. For now the German economy seems to be firing on all cylinders and accelerating. But we know that acceleration phases run out of gas and this one is already driving at a pretty high speed, high enough that it won't be sustained for much longer. Neither is it clear what will happen when this acceleration phase runs out. The German unemployment rate is at a post reunification low, but there are few signs of economic distress or excesses of pressures that might be caused by growth that is taxing economic capabilities.