Latest Ifo Confidence Indicator Continues To Fall. Expectations At Recession Levels

The IFO's measure of business confidence declined 2.8% in August after declining 3.7% in July and 2.1% in June. The index is now 10.6% below a year ago and, at 94.8 (2000=100), the lowest level since June, 2005.

The overall measure is a combination of the views of the participants in the survey on the current situation and the outlook 6 months ahead. Views on the current situation have been in a down trend since December, 2006. Expectations weakened a few months earlier, but recovered to reach a peak of 108.6 in April, 2007. The subsequent rise in the price of oil and the strong euro began to dampen expectations and then the repercussions of the sub prime mortgage crisis began to be felt. The index for expectations is now at levels reached in the long recession of the early years of this decade as can be seen in the first chart showing the three indexes.

Also released today was the Federal Statistical Office's revised GDP for the second quarter. The 0.5% decline from the first quarter was confirmed but the first quarter growth was lowered to 1.3% from an unrevised 1.5%. While part of the decline might be attributed to the inability of the usual seasonal factors to deal with the extraordinarily mild winter, the percentage change in the two quarter average of this year is among the lowest of the past few years, as can be seen in the second chart. While the government still stands behind its forecasts of a 1.7% increase this year and 1.2% for 2009, private forecasters are beginning to lower their estimates.