October ifo index declines; German sentiment “clouded over”

Summary: ifo business climate index declines 1.2 points to 97.7 in October, slightly below expected figure; expectations, current conditions indices both down; business sentiment “clouded over”; supply problems continue, falling capacity utilisation rates; expectations index implies euro-zone GDP contraction of 0.2% in year to January 2022.

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 97.7 in October. The reading was slightly below the expected reading of 98.0 as well as September’s final reading of 98.9. The average reading since January 2005 is just above 97.

“Sentiment in the German economy has clouded over,” said Clemens Fuest, President of the ifo Institute. “Supply problems are giving businesses headaches. Capacity utilisation in manufacturing is falling.”

The expectations index also fell from September’s revised figure of 97.4 to 95.4, lower than the generally-expected figure of 96.6. The current situation index declined from 100.4 to 100.1.

German and French long-term bond yields declined a little on the day. By the close of business, German and French 10-year yields had each slipped 1bp to -0.12% and 0.22% 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.  October’s expectations index implies a 0.2% year-on-year contraction rate to the end of January 2022.


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