German IFO: Business Confidence Claws Its Way Out of a Hole

Germany's IFO index shows improvement in February compared to January. The climate index improves, the current conditions index improves, and expectations improve. All three all-sector headlines improve in February compared to January. However, all three metrics continue to register net negative readings, indicating that the sectors are showing more contraction than expansion, but less contraction than it had been the case previously. We ranked these headlines on data back to 1993; the climate index has a 22.5 percentile standing, expectations have a 22.4 standing, and current conditions have a 16.9 percentile standing. All three of the headline metrics have standings in the lower quartile of their queue of values back to the early 1990s. This is clearly not a stellar report but a report from an economy that is struggling. Even though it's widely reported that the climate index is currently on a six-month high; it may be on a six-month high, but it's not really much different than it was six months ago and only up by 1.1% from its lowest mark in the intervening five months—so not impressive. This is a grueling, crawling, dig-out from difficult circumstances. The COVID pandemic was a sucker punch to the global economy, and it was followed by the Russian invasion of Ukraine that hit Europe especially hard because of the proximity.

Since then, other geopolitical tensions have risen. Europe's relationship with the United States has deteriorated, in part because Europe—Germany in particular—was reluctant to detach itself from its mercantile relationships with Russia and was also reluctant to increase its financial participation in NATO. The U.S. was carrying the burden of the protective umbrella for Europe at a time when Europe didn't really think it needed a protective umbrella and so it was unwilling to pay for anything more substantial. When the rainy day came and when the Russian invasion of Ukraine occurred, Europe was completely unprepared and the U.S. was its protector. While Germany and other European countries quickly made it clear that they were fully on board with NATO defense, the U.S. was much less enthusiastic about carrying the burden after Europe had put its financial probity ahead of its defense spending obligations. Now Europe does not see the U.S. and its perceived greater needs for security because of improved navigation from the Arctic Circle to the North Atlantic.

These troubles continue to dog the relationship between the United States and Europe, and the European Community. And Europe’s own economic struggles continue. In the climate readings, all four of five sectors improve from January to February. Current conditions improve in three of the five sectors, with retailing and wholesaling slipping month-to-month. Expectations do improve overall, but three of five sectors take a step back in February, with expectations improving sharply for services, and substantively for wholesaling. Still manufacturing, construction, and retailing expectations stepped back.

Across the three broad areas of assessment across five sectors in each, there are only two (two of fifteen) sector metrics that rank above their 50th percentile (above their respective medians) when ranked against readings back to 1993. Both of those elevated rankings are for construction, one for Climate, and the other for current conditions, but construction expectations, at a 44.5 percentile standing, are not far below their median.

Still, the lowest environmental standings are for services, except under expectations where the services reading is second-weakest to retailing. The graphic shows some tendency for an upturn in climate and current conditions, but they are countered by an expectations path that has topped out and has been gradually leaning lower—and doing that with a current ranking in only its 22.5 percentile. So, while there is some life in the IFO survey this month, we are still looking at a patient in intensive care, not one ready to join Olympic competition—at least not yet.