Less Pessimism Among German Business Executives

German business confidence improved in January in contrast to that of investors and consumers, but it is still relatively subdued.  The IFO institute, which surveys some 7000 executives in manufacturing, construction, wholesale and retail trade, reports its results in two ways: in index form with (2000=100) and as a percent balance between those who see improvement and those who see deterioration.  The index is useful in tracking the ups and downs in confidence, but the percent balances give some insight into the degree of confidence of the  participants.  For example, in January, the index of current conditions increased to 91.2 from 90.4 in December and the percent balance increased to -21.0% from -22.6%.  Thus both measures showed an improvement in the appraisal of current conditions, but the percent balance also showed that there were still 21% more respondents who appraised current conditions negatively than those who appraised them positively.

The IFO's headline measure of confidence, the Business Climate for all industry, is a combination of the replies of the participants regarding current conditions and expectations for the future.  The percent balances for the Business Climate, Current Conditions and Expectations for the future are shown in the first chart.

The Business Climate for all industry has improved steadily since March of this year when it was -42.8% to -9.0% in January.  There has been little change in construction climate.  The pessimists still exceed the optimists by 21.5%.  The climate in retail trade has fared better than that of construction, but the pessimists still exceed the optimists by 12.8%.  The strongest improvements in confidence have taken place in manufacturing and wholesale trade climates, where the pessimists now exceed the optimists by only 4.7% in wholesale trade and 6.6% in manufacturing. These trends are shown in the second chart.

Most of the percent balance data in the latest survey are still negative indicating that the predominant mood of most German business executives is still pessimistic, or at best, skeptical. There is, however, one notable change.  The latest survey shows that, for the first time since August 2007, there is a small, but significant, excess, 3.7%, of optimists over pessimists regarding business expectations.   In November there was a balance between optimists and pessimists and in December an excess of optimists of 0.2%.