German Ifo Slips

The German Ifo survey slipped to an index level of 110.4 in May from 111.2 in April. Both the current situation and the business expectations components fell on the month. The index and its components still are well above their average values: by 5.4% for expectations and 10.5% for current conditions. The climate reading stands in the 84th percentile of its historic queue of values; it has been higher only about 16% of the time. However, the index has lost momentum this month.

The diffusion indices by sector in the Ifo report show that there was a broad stepping down in activity among all the sectors. The all-sector index fell to a 13.2 reading in May from 14.8 in April. It still represents a strong standing as the all-sector index is in the 87th percent of its historic queue.

Manufacturing slipped to a net reading of 19 in May from 20.2 in April. It still stands in the 83rd percentile of its historic queue.

Construction, already with a negative reading, slipped from -3.5 in April to -4.0 in May. Still, the construction reading is strong in the 92nd percentile of its historic queue. At that level, it has the strongest relative standing of all sectors in May.

The wholesale sector also slipped from 14.4 in April to 11.4 in May. That slip brought the sector down to the 85th percentile of its historic queue.

Retailing fell in May and fell rather sharply; it fell to a value of 4.9 from April's 7.7. That drop has reduced retailing to the 90th percentile of its historic queue, still a very strong reading that leaves it as the second-strongest sector in relative terms.

Expectations dropped the most this month, falling by 1% month-to-month. While the current index fell by only 0.4% on the month. Still, expectations are the relatively stronger reading as expectations still reside in the 85th percentile of their historic range compared the 78th percentile for current conditions. Germany has been buffeted by several forces. One of them is the concern over its linkages to Russia: the ongoing threat that there may be further sanctions against Russia and the clear, sharp economic slippage in the Russian economy. Additionally, there are issues in the euro area and what appears to be an on-again, off-again plan for the European Central Bank to become more aggressive with policy. We've already seen GDP growth for the first quarter. A number of European Monetary Union countries disappointed markets with their GDP performance even though the German economy's first quarter result beat expectations.

Globally, most countries are still struggling with growth and many are still struggling with an inflation rate that's too low. Many of these countries and regions like the US and the EMU continue to assert that they don't have any problem or threat of deflation. But policies in each case register some concern about the low level of inflation. In the case of the US, it is winding back policies to stimulate its economy while its inflation rate has moved up closer to its 2% threshold. Still, the Federal Reserve does not expect inflation back to 2% until late 2016 and vowed, though its forward guidance, to keep policy accommodative until that happens. In the EMU, growth continues to be weak, uneven and somewhat suspect. Its inflation rate continues to linger, below 1%, despite the European Central Bank having a 2% inflation objective. We are waiting to see if the ECB is going to address this situation with more hostile verbiage or with a policy move.

While some EMU countries have made progress, growth continues to be weak in the EMU and uneven across members. Although the recent PMI data from Markit appear to show an improvement of the services sector for the EMU as well as Germany, is it enough? In Germany, the service sector pickup suggests that the domestic economy is doing better. However, Germany still needs a driving force from its industrial sector and export sector. It will be important for us to track how the German manufacturing and services sectors are doing as we monitor developments in German confidence. It's doubtful that Germany could continue to be strong if it had to rely on its domestic demand. That would only take it so far. The German economy is geared to have manufacturing and trade as its lynchpins. While German economic linkage to Russia is not really sizeable, it is big enough that the sudden weakness in Russia and the nagging problems in the euro area are taking a toll on German confidence and economic activity. It's worth keeping tabs on; Germany is not invincible.