German Ifo Index Advances as Expectations Lag

The Ifo index continues to rise in August. The all-sector climate index is up to 7.6 in August from 5.0 in July. At that point it stands in the top 20% of its historic queue (80.5 percentile). These queue standings place the current reading in its percentile position of its ordered queue of data from November 1991 to date. Note that queue percentile positions are quite different from range percentile standings (% range). The queue measure uses all historic values to position the current reading. The range percentile places the current value between its historic highs and lows and therefore uses only three values in its formulation. If there is an outlier - high or low - the range reading might not be representative. Since the queue reading is based on all data it is representative.

Manufacturing improved sharply to 11.1 from 7.9. Its queue standing, despite its relatively higher net reading, is relatively lower than for the all-sector climate index as it stands only at at the border of the top one third of its historic queue, at the 66th percentile.

Construction is the sector that has weakened the most in August. It's fallen from a -1.5 reading in July to a -4.2 reading in August. However, when measured against its own history, this negative reading emerges as a relatively strong reading. Even the -4.2 reading stands the top six percentile of the construction sector's historic queue. You can see this in the table as the construction sector's average score is -27.4.

Wholesaling, a sector that includes international trade, improved very sharply in August to a +7.7 net reading from a -0.2 mark in July. At that standing, wholesaling is in the top 18 percentile of its historic queue.

Retailing has slipped in August. Its reading has fallen to 2.6 from 3.0. Even so, this is a relatively strong reading for retailing whose period average is -14.4. At its August level retailing stands in the top portion of its 88th percentile.

While we think the right way to filter these current diffusion values from the Ifo is to measure them relative to their historic past, it's clear that retailing is hardly the driving force for improvement of the index in Germany. Despite the setback this month in retailing, its 2.6 reading is the highest since July 2012 apart from the higher number that was produced last month. And even the July 2012 figure appears to been aberrant as it emerged after a 0.4 reading and then submerged itself with a -5.0 reading the very next month. The last really strong string of German retail responses ran from July of 2010 to July 2011.

Despite the fact that the German economy is doing better, there is little evidence that it's doing better in a way that's going to benefit the other countries of the euro-Zone. It will benefit the aggregate measures of euro-Zone activity because of the weight that the German economy has in the various euro-Zone statistics. But that's quite different from generating economic activity that spreads to boost activity in other countries that occupy the Zone. That step still appears to be missing. Although retailing has improved smartly in the last two months compared to a long previous string of data, those readings are still well below levels that could be construed as providing locomotive effects for the rest of the European Monetary Union

The standing for current conditions in the German economy moved up very sharply to 12.5 in August from 8.9 in July; at that level it sits in the 80th percentile of its historic queue. However, expectations which did improve to +2.9 from +1.1 show a relatively more modest, sitting at the 69th percentile of their historic range (just short of the top 30%). In Germany, as current conditions have improved, expectations continue to linger at lower levels reflecting some degree of suspicion about the permanence of the current improvement.

Both current conditions and expectations readings have been waffling. Current conditions were generally much stronger from July 2010 to August 2012. Since then the current condition index has dipped and has been trying to reestablish itself for the entirety of 2013.

Business expectations are relatively solid from March 2010 through June 2011. Thereafter, there came some erratic slippage, a number of negative values, some switch back into the positive followed by another string of negatives. Currently, business expectations are positive for three months in a row following two months of declines, two months of increases before that, and preceded by a nine month string of negative readings. So, is Germany finally out of the woods? Are three 'plus' values conclusive evidence?

The positive expectations readings are encouraging. However, they are still too-low to be viewed with any kind of enthusiasm. The relative standing of German expectations compared to the relative standing of German assessments of current conditions strongly suggest that this is exactly how the Germans view the situation themselves. They view the current conditions as "pretty good," but assess the future with a good deal more skepticism. However, that skepticism has come with bit more optimism as we are coming off of three straight months of positive readings...

Our theme is perhaps a bit different from some others. It is not that Germany is going to lead the European Union to the promised-land. Rather it's that the European Union cannot begin to approach the promised-land until most of the Union is on board with solid growth. Germany must play a role but not simply by growing more. Germany must take a role in altering the Union's structure to encourage more growth. This will involve some check-book diplomacy. Germany does not have an economy designed to drag the rest of Europe into its growth orbit. The German economy is essentially a loner. It's an economy that's driven by export-led growth. It's an economy that actually feasts on increases in the domestic demand of its neighbors because of its extreme competitiveness. As such, it's actually the improvement in the surrounding countries, as well as in countries well-outside of the European Monetary Union, that can help to drive the German economy. For these reasons it may well be that the improvement in Germany is some indication that conditions are improving within the the rest of the European Union to some extent. However, there are still many things in the Union that need to be fixed; to be put on a more solid footing before it can be sure of growth- sustainable growth. For that reason we continue to remain somewhat skeptical about European progress and we share with Germans their uneasy assessment about the future; part of that is the uncertainty about the role that the Germans themselves are prepared to play. That probably will not emerge until after the mid-September German elections.