Germany: Steady as the Ifo goes

Germany’s most prominent leading indicator continues its upward trend but shows a reshuffling of current assessment and expectations.

In September, the Ifo index increased for the fifth month in a row, coming in at 93.4, from 92.5 in August, however, the index still remains below its pre-crisis levels. The current assessment component increased significantly, to 89.2, from 87.9, while the expectations component almost levelled off, coming in at 97.7, from 97.2 in August.

Having said that, the expectations component is at its highest level since November 2018.

When assessing the current state of the economy, one needs to make a distinction between rebound and recovery.

While all indicators point to a v-shaped rebound of the German economy in the third quarter, the shape of the recovery remains uncertain and depends substantially on the evolution of the virus and a possible vaccine.

After the worst quarterly performance ever (-9.7% QoQ), the German economy is set to surge by between 5% and 10% QoQ in the third quarter. There is still too little hard data available to give a more precise estimate in these unprecedented times. The Bundesbank’s GDP growth tracker, e.g. currently points to GDP growth of more than 7% QoQ. However, this indicator underestimated the contraction in the second quarter significantly and still needs to prove its predictive powers.

Given the recent softening of leading indicators, however, there is a risk of a double-dip in the fourth quarter, unless social distancing rules are eased further; a very unlikely scenario given the latest increase in new Covid-19 cases.

On a more positive note, some Covid-19 related tensions in the German industry seem to have been alleviated. According to survey data, the lack of equipment and access to finance are no longer concerning issues for production as they were in the second quarter.