Ifo Turns Mixed in March as Headline Drops

The Ifo continues to hold the high ground with its overall index standing in the top 15% of its historic range. The current situation stands in the top 21st percentile and the expectations index stands in the top 14th percentile, historically. Still, the overall index slipped in March, dropping to 110.7 from 111.3. The drop was caused by weaker expectations which fell to 106.4 from 108.3. The current index continued to improve, rising to 115.2 from 114.4. Year-over-year percentage changes on these indices show much the same trends with the overall index rising technically and only slightly faster year-over-year. This compares to a strong acceleration in the current situation's growth rate in March to 4.8% and to year-over-year slippage in growth to 2.7% for expectations from 3.5% previously.

The diffusion indices give us a look at the underlying sectors that are driving German industry. On the month there is one outright negative reading. That is from construction; it represents a sizeable set back month-to-month, dropping from a 0.6% reading in February.

Manufacturing and wholesaling also fell to lower levels last month; however, each of these sectors still has a positive diffusion value, indicating that each is still expanding.

The 'strong sector' this month is retailing as it was the only sector to rise.

As a result of the weak sector activity, the overall diffusion reading fell to 13.8 from 14.9. Despite the fall in March, it is still above its January level.

The standings of the sectors in their respective historic queues are still high. Sector standings are led this month by retailing. It stands in the 93.5th percentile of its historic queue, which tells us that the sector has been higher than its March value less than 7% of the time. Construction, despite its sharp drop, has the second strongest index level standing at the 93rd percentile of its queue. Wholesaling stands in the 84.8th percentile of its queue. Manufacturing, the lowest standing sector, is still quite solid in the 84th percentile of its queue. As a result of these sector standings, the overall all-sector index is positioned in the 89.6th percentile of its historic queue. These strong standings make Germany the envy of every other country in the European Monetary Union.

On balance, the German Ifo index took a hit this month. But the negative jolt is from expectations and may have a good deal to do with concerns over the impact on Europe from the geopolitical mess in Crimea rather than being due to some economic slippage. The current index which does not stray as far from the current economic pulse, continued to rise this month. The German economy is still advancing, but there are some question marks on the horizon. We also saw backtracking in the month's PMI data for Germany as well as for the EMU as a whole.

Geopolitical events are not to be set aside or trifled with. Their impact can be swift and devastating or they can come slowly with significant cumulative effects. The decision to scrap the Sochi G-8 meeting and to reconvene a G-7 meeting, excluding Russia, at mid-year in Europe is a very bit public slap in Putin's face.

Russia has yet to take any significant countermeasures against the West. So far, the negative impact on the West will only be felt though the Western companies that have been and still are doing business in Russia that will now see their activities curtailed and under special scrutiny. There will be general knock-on effects from Russia's oncoming weakness as well. But there is a potential for this to go farther, especially as Russia slips into recession. Putin has not been wary of taking off the gloves as we see in his bold snatch of Crimea even as Russia hosted the Olympics and ostensibly put its good will on display for the world. Boy, did it ever. We can have no doubt about Russian 'good will' any more.