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Economy in Brief

Germany's IFO Survey Continues to Sink
by Robert Brusca  September 26, 2022

The all-sector IFO climate gauge fell to -20.1 in September from -13.4 and August, a sharp decline that represents erosion in all major categories. The manufacturing sector registered a -14.2 reading on climate in September, down from -6.8 in August; construction is at -21.6, down from -14.8 in August; wholesaling is at -26.4, down from -21.6 in August; retailing is at -39.8, down from -31.9 in August; and services fell into negative territory at -8.9 after logging a +1.4 reading in August. The readings are lower across the board and all the readings show net negative figures in September.

The percentile standings for the climate readings show how weak the rankings are. The all-sector index is at the 5.3 percentile on data back to 2005, manufacturing has a 7.7 percentile ranking, construction is at a 15-percentile ranking and that's the strongest sector overall. Wholesaling has a 4.3-percentile ranking, retailing has a 0.5-percentile ranking and services have a 1.6-percentile ranking. There is extreme cloudiness, thunderstorms in progress, with no silver linings.

There is simply relentless bad news in the German survey. It's been weakening for quite a period of time after peaking in 2018 and falling for Covid then peaking at a lower post-Covid peak in 2021. This month, rather than slowing down its pace of decline or beginning to reach a low point and flattening out, conditions have eroded and continued to deteriorate by a strong amount on the month. While there has been some let up in the relentless commodity price inflation, and oil prices have fallen from their high, Germany is being threatened by the shutting of the pipeline. That could result in severe energy source shortages over the winter. I believe people are starting to factor in a belief in the worst rather than to hope for the best as the war in Ukraine has turned worse for Russia. That worsening is going to put even more pressure on Russian President Vladimir Putin as it increases the probability that he will try to create as much disaster, dislocation, and chaos outside of his borders as he can using economic warfare- and other means.

The current conditions index also shows declines month-to-month. All sectors weakened on a month-to-month basis in September based on current condition assessments. However, only retailing has a net negative reading at -14. The all-sector current reading falls to 15.4 in September from 22.3 in August. Manufacturing falls to 12.8 from 18.4. The construction sector weakens to 6.9 from 12.6. Wholesaling weakens to 5.8 from 11.0. Services weakens to 22.7 from 30.9. The rankings by sector show readings that are uniformly in the lower 25th percentile or weaker in their respective historic queues of data. The sole exception is the construction sector that hovers above its median reading at 62.8 percentile.

Expectations readings also fell across the board on the month. The all-sector expectations reading fell to -42.3 in September from -31.3 in August. That reading has a -49.2 all-time low; this month's reading is at -42.3. The all-sector expectation reading has a 0.5 percentile standing; it has been weaker only 0.5% of the time since 2005. In fact, all the components have 0.5 percentile standings except manufacturing that has a 2.9 percentile standing and retailing that is at its historic low point.

These readings leave no room for doubt about what conditions are or how they changed in August or about what is expected for the future. This does not mean that Germany's fate is sealed despite the widespread agreement in the readings. It just means that based on current conditions, what is known, the way people can assess the future, based on current knowledge, there is today some extreme pessimism. Conditions – realities- could shift in the future and change this pessimistic train of events….or not.

For now, this is a clear - and clearly upsetting- assessment of conditions and of Germany's predicament. For much of the world, it is concern about inflation, central back activity, supply chains and lingering Covid impacts that dog confidence and the outlook. But for Germany, the war between Ukraine and Russia that puts the pipeline and its lifeline supply of energy in play that is its central focus. All the other concerns that are paramount for the rest of us, pale in comparison with Germany's concerns about its energy predicament. There is no 'get out of jail free card' for this. The outlook for the future remains grim for Germany and in Europe.

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