UK and German Business Confidence Gains Pause in May; Export Demand Favorable

Two widely followed industrial surveys in Europe showed a slight pause in their May results, following marked improvements in the prior couple of months. They also both indicated continuing firmness in export sectors, but some hesitation in domestic activity.

The UK's Confederation of British Industry (CBI) reports that the balance on total industry orders is -12 for May, down from April's -11, but obviously much better than anytime in the previous year. Within total orders, those for exports gained dramatically, reaching a neutral value for the first time since February 1996. Thus, the UK is seeing significant and persistent improvement in export demand, but this month's gain there, combined with the decline in the overall orders balance, shows that the domestic sector faltered. In total then, the progress in manufacturing remains tenuous.

The German organization Ifo, which specializes in applied economic research, reports that in its latest survey, the overall Business Climate Index edged down to 105.6 this month from 105.9 in April (2000=100), corresponding to diffusion balance figures of +10.4% and +11.0%, respectively. As Louise Curley noted here a month ago, these are the best readings since the spring of 1991; manufacturing, despite a slight downtick this month, is experiencing the best readings in the total history of the survey.

Details are not yet available for the factors in the Ifo survey, but as shown in the table below, wholesale trade continues to gain, while retail trade has moderated. This suggests that as in the UK, domestic demand -- at least consumption -- remains fragile, while broader industry is still advancing. Businesses also report to Ifo that they are less confident about activity in the next six months; the business expectations index decreased 3 points from 13.4% in April to 10.4% in May, which also is the lowest since January. The business situation index, in contrast, continues to increase, showing that current activity is expanding at more and more firms.

We'd guess that skepticism over the outlook is related to energy prices and to the recent surge in the euro. While the latter wouldn't correspond to assessments of better export performance, it also might foster more imports, to the detriment of local industry. So, despite the recent gains in both Germany and the UK, it's not hard to understand that business leaders remain cautious.