By: Alessandra Yuan – Forex Focus
The business confidence index rebounds to a dramatic six-month high.
The Ifo Business Climate Index for Germany jumped to a six-month high of 103.8 in August, after climbing by 2.1 points from the previous month’s survey. The business sentiment index released monthly is a widely followed indicator that analyzes the current economic activity in Germany and is quickly accessible compared to other economic indicators, such as gross domestic product (GDP).
The index has been in a downward spiral since hitting 105.3 in November of last year, with the July numbers coming in at 101.7. The August reading, however, is a rebound of sorts, beating even analysts’ expectations of a 101.8-101.9 reading, as sentiment improved across most business verticals. Meanwhile, the key indicators, or the sub-indices of the business sentiment index comprised of future expectations, moved up by 3 points to 101.2; while current business conditions improved by 1 point to 106.4.
The Ifo Business Climate Index is a composite index compiled by the Munich-based Information and Forschung (Ifo) Institute for Economic Research. The index is a survey of firms in the manufacturing, services, trade and construction industries on current business conditions and their expectations for the next six months.
A better-than-expected number is largely considered to be good for the economy and the euro in general.
A deeper analysis into the broader sectors shows that:
The index for manufacturingrebounded after six successive monthly declines, with the automotive sector being the most optimistic among the companies surveyed. Although current business conditions were rated a little less positively, the industry is more optimistic about the future outlook, with companies looking to scale up production.
The services sectorregistered significant improvement in the business climate, with service providers more satisfied with the current business climate and much more optimistic in their future expectations, with the rise in expectations putting it at its highest level since June 2009.
On the tradefront, the index saw a marginal uptick. The survey showed that retailers and wholesalers are slightly dissatisfied with the current conditions, while negative expectations over a six-month period declined to a certain extent.
The construction industryremained upbeat, with the business-climate index hitting fresh records. Contractors surveyed were somewhat more satisfied with the ongoing situation, while they were much more optimistic in their expectations for the next six months.
Germany is the largest economy in Europe and the fourth largest in the world after the United States, China and Japan. According to recent data from the International Monetary Fund (IMF), the country’s economy is valued around $4.2 trillion, and economic expansion in Germany is key to the broader economic growth of the countries within the eurozone.
Germany reported a seasonally adjusted 0.5-percent GDP growth in the second quarter of this year, higher than the 0.4 percent registered by the broader eurozone countries during the same period. This compares with the 0.4 percent in first-quarter 2018, in line with the eurozone numbers. The German economy has been expanding at an average pace of 0.4 to 0.5 percent in the last few quarters, lagging behind the eurozone’s growth rate of around 0.6 to 0.7 percent during the corresponding period.
The positive economic advance in the country is led by household consumption and business investment, as employment growth is spurring domestic demand; although on the trade front, the country reported a net deficit for the quarter. Year-on-year, the country’s economy expanded at 2.0 percent, the slowest since the January-March quarter in 2017 and below the 2.2-percent growth in the euro-area countries.
According to CESifo Economic Studies, the robust domestic economic conditions in Germany and a ceasefire in the trade conflict with the United States were the leading drivers to the rise in business confidence. While the construction index was the best performer, the services sector came in second with the highest reading since December of last year. The manufacturing and trade indices were the worst performers, although the outcomes of the surveys of the two indices were at four-month highs.