Looking Ahead To Ifo Business Climate From Germany

It’s never a good sign for the Euro when the words “technical recession” are brought up in analysts’ talks. Of course last year Germany narrowly avoided one, but the economic news since then hasn’t improved much. This has depressed the business climate, and the projections seem to be for further bad news.

A little after Ifo data tomorrow, we’ll get the ECB’s monetary policy decision which is likely to overshadow most of the data for the day. But, this German data could not just move markets right away, but give us insight into how the Euro might perform in the medium term.

What We are Looking For

The Ifo surveys major businesses in Germany to ask how they perceive the current business conditions, and how they think things will be in six months. Numerical values are given to the two assessments. Over 100 is seen as growth whereas anything below that contraction. To generate the result, the two numbers are averaged. But typically the market is more interested in what’s coming up, so focuses more on the relative values of Expectations and the Situation number.

Since the major businesses are representatives of the drivers of economic growth and employment, having an Expectations number higher than a Current Situation number would be an indication that in six months the German economy will have substantially improved. Likewise, lower expectations are generally a bad sign for the Euro.

The Numbers

The Business Climate in Germany is expected to have worsened slightly to 96.7 from 97.4 in the prior month. The climate has been below 100 since January and keeping a slowly deteriorating trend. The market is likely to have priced in a negative result. So, a surprise beat on expectations could give the Euro a lift. Conversely, a move below 96.0 would show a steepening of the negative trend and provide some substantial weakness in the shared currency.

Current Assessment is expected to deteriorate further to 98.7 from 100.8. Since the last recession, this would be the first time it crossed into the negative. Naturally, a negative read in all three of these indicators is giving a bad sign for Germany’s GDP.

Expectations are the only bright spot in this dataset. These are projected to improve slightly to 95.2from 94.2. This would bring them off multi-year lows and might give some hope that the situation in Germany might turn around soon. Part of that might be pricing in action from the ECB over the coming months. We might see this revert if the central bank disappoints.

What’s Going On

Earnings season is getting off the ground in Europe with a few major German companies already reporting. Their results have been broadly disappointing. Usually, the first companies to report set the high mark of the results. Market uncertainty regarding Brexit is taking its toll, but so are concerns over regulations and particularly trade. German companies with high exposure to foreign markets are among the worst performers. This is a worrying sign for the 40% of the economy that is trade.

The German auto industry, in particular, is suffering under a dual blow of new emissions standards and trade concerns. Vehicle sales in Germany have notoriously suffered and dragged down the Euro in response. Many analysts are pointing to the structural problems that are plaguing Germany as an argument that further ECB easing won’t be sufficient to pull the Euro Zone away from the brink of recession. Unless there is a substantial improvement in corporate earnings over the next couple of weeks, we will likely see further deterioration in the Ifo numbers over the next couple of months.