ifo index drifts lower in September, manufacturing experience “bottleneck recession”

Summary: ifo business climate index declines 0.8 to 98.8 in September, slightly above expected figure; expectations, current conditions indices both down; procurement of raw materials, intermediate products “putting the brakes on”, manufacturing experiencing “bottleneck recession”; expectations index implies euro-zone growth of 0.7% in year-to-December.

Following a recession in 2009/2010, the ifo Institute’s business climate index largely ignored the European debt-crisis of 2010-2012, remaining at average-to-elevated levels through to early-2020. However, the index was quick to react in the March 2020 survey, falling precipitously. The rebound which began in May of that year was almost as sharp but it was also characterised by a period of below-average readings which lasted until early 2021.

According to the latest figures released by the Institute, its business climate index declined to 98.8 in September. The reading was almost in line with the expected reading of 98.5 but it was also slightly below August’s final reading of 99.6. The average reading since January 2005 is just above 97.

“Companies were less satisfied with their current business. They were also more sceptical about the coming months. Problems in the procurement of raw materials and intermediate products are putting the brakes on the German economy. Manufacturing is experiencing a bottleneck recession,” said Clemens Fuest, the president of the ifo Institute.

The expectations index also declined from August’s revised figure of 97.8 to 97.3, above the generally-expected figure of 96.5. The current situation index decreased from 101.4 to 100.4.

German and French long-term bond yields both increased moderately on the day. By the close of business, German and French 10-year yields had each gained 3bps to -0.23% and 0.11% respectively.

The ifo Institute’s business climate index is a composite index which combines German companies’ views of current conditions with their outlook for the next six months. It has similarities to consumer sentiment indices in the US such as the ones produced by The Conference Board and the University of Michigan.

It also displays a solid correlation with euro-zone GDP growth rates. However, the expectations index is a better predictor as it has a higher correlation when lagged by one quarter.  September’s expectations index implies a 0.7% year-on-year growth rate to the end of December.

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