IHS Global: Wholesale and retail trade drive Germany’s Ifo business

climate index to yet another post-unification record in June

 

Frankfurt/Main (26.6.17) – In June, the headline Ifo business climate index reflecting conditions in industry, construction, and wholesale and retail trade increased anew from 114.6 to yet another post-unification and thus post-1990 high of 115.1. This therefore exceeds the levels seen during the heyday of the post-Lehman recovery of 2010-11 when GDP growth temporarily reached 4%. Germany’s current business climate compares to an interim high of 108.6 just before the UK referendum on Brexit in June 2016, a long-term average of 102.0, and an all-time low of 83.6 in March 2009 in the wake of the Lehman collapse. The Ifo recovery is even more impressive than the strong improvement of the manufacturing PMI index since the autumn months of 2016. The Ifo institute comment on the latest data by saying that “German business leaders are in high spirits”.

 

The expectations component edged up further from 106.5 to 106.8, its highest level since February 2014 and well above its long-term average of 100.5. Current conditions increased by an even larger margin from 123.3 (revised up from 123.2) to a new all-time peak of 124.1. The previous record had been set in mid-2011 at 122.2 in the context of the post-Lehman recovery. Note that the last time that the current conditions index has been below the present long-term average of 103.7 was seven years ago, and the last downward correction of some length (April-October 2014) bottomed at 108.3. It appears that the high degree of international political uncertainty during the past year, which in part remains ongoing with respect for instance to Brexit negotiations and US developments, no longer weighs down on German business optimism. The encouraging outcome of the French presidential and parliamentary elections (with a view to reform and thus long-term European growth prospects) has most likely helped in recent weeks.

 

Note that the release of the separate Ifo survey about the climate in the service sector – a series available since January 2005 – will now always be a day after the release about conditions in industry, construction, and wholesale and retail trade described above. In May, the services survey (released on 24 May) had revealed stabilization after five consecutive declines. Having reached an all-time high of 35.4 in November 2016, the headline index rebounded marginally from 25.9 (revised up from 25.5) to 26.0. Nevertheless, this represents underperformance versus the business climate in industry, construction, and wholesale and retail trade. Services expectations did rebound from 10.1 to 12.9, however, climbing back above its long-term average of 11.6. Expectations had reached an interim peak of 24.4 in October 2016 and an all-time high of 25.8 in November 2015. Meanwhile, current conditions in the service sector, which had already rebounded in March, fell from April’s 43.0 to 39.9 in May. Nevertheless, compared to expectations, current conditions remain closer to their all-time high of 47.5 of November 2016 and well above their long-term average of 24.9. The development of the last two years reveals that the overall service-sector index initially unwound the break-out to the upside observed in the second half of 2015 during Q1 2016, then rebounded anew to a record level in November 2016, but has since encountered a fresh setback. During the more than twelve years of history of this service sector series, expectations have fluctuated between -25.6 (December 2008) and 25.8 (November 2015), and current conditions between -13.1 (May 2009) and 47.5 (November 2016).

 

Meanwhile, the breakdown of the main Ifo survey by sector, relating to goods production and trade, reveals a split between improving wholesale and retail sectors and broadly steady business sentiment in manufacturing and construction. Optimism in manufacturing, which has been enjoying a fresh upswing since February, edged up marginally and remains at a six-year high. The slight improvement in June was driven by expectations, and the Ifo institute has highlighted that demand and the stock of orders are developing very positively and that production plans are in expansion mode. Construction sentiment, which had also been rebounding during March-May after a brief setback in early 2017, slipped slightly but remained close to post-1991 highs. The Ifo institute add that strong orders suggest that prices in the building sector will increase. Meanwhile, business climate in the wholesale sector improved for the third consecutive month, driven by both expectations and current conditions and reaching a new all-time high (since 1991). Finally, retail sector sentiment, which had corrected moderately in May, improved markedly to its highest level since early 2014. This was mostly due to a sharply better assessment of current conditions, but expectations also improved, reaching a 21-month peak.

 

Overall, June’s Ifo business climate report illustrates that growth momentum in the German economy may be yet stronger than last estimated. The Ifo data conveys an even more robust picture than what is reflected by manufacturing PMI data in recent months. Manufacturing sector exports are apparently benefiting from brighter global and especially European demand prospects as well as the still fairly weak euro, and construction continues to be structurally supported by factors such as demographics and persistently low interest rates. At the data edge in June, retailers are apparently reporting a fresh surge in demand as consumers have not only digested the shock of the spike in inflation during December-February but are now benefiting from the latest decline in oil prices during May/June. Interestingly, the climate in the services sector already steadied in May following slippage in early 2017, and a rebound in June (release tomorrow) is now very likely in view of retailers’ increased optimism.

 

Having been raised modestly a month earlier, the June IHS Markit forecast for (calendar-adjusted) GDP growth in 2017 and 2018 has been left at 2.0% each. Near-term underlying growth momentum is even around 0.6% q/q (thus close to 2.5% annualized), but it should be kept in mind that a recoil effect affecting construction output after the mild winter is likely to restrain second-quarter growth to 0.5% q/q. Improved European growth prospects following political developments in France (election of Emmanuel Macron as president and absolute majority for him in parliament, opening up reform potential) will be supportive also for Germany’s economy in the months ahead. This is only partially offset by potentially disruptive developments linked to the Brexit negotiations and possible protectionist measures by the Trump administration in the US.

Timo Klein,  Principal Economist | IHS Markit Economics