German IFO Climate Edges Higher; More Cross Currents Than Trends

The Germany’s IFO index moved higher in April to a reading of +0.3 from a reading of -0.8 in March. Two of the five components among the sectors log positive values in April; those are manufacturing and services; manufacturing showed a small improvement as services, while staying positive, backtracked from its reading in March. Retailing had a stronger value at -11.3 in April compared to -13.5 in March. Construction also improved to -16.7 from -17.5 in March. The wholesaling sector, however, deteriorated to -10.3, down from -7.5 in March. On balance, the climate readings in April were mixed in terms of their month-to-month changes but remained weak in terms of their standings. Only two sectors show standings above their historic medians on data back to 1991: those are construction and retailing with construction at a standing at 52.2% and retailing at a standing of 53.9%. Manufacturing has a standing of 45.5%, wholesaling is at 38.3% and services at 21.6%. However, based on the weighting scheme, the all-sector index surpasses 50% with a reading of 50.3%, bringing climate overall to an above-median reading by a small margin.

Current conditions in April slipped with the all-sector index falling back to 16.4 from 17.5 in March. April saw slippage in each of the five sectors. Each sector logged a positive reading in April but in each case, it was lower than the positive reading in March. Current conditions showed most sectors- 4 out of five of them; in fact, with readings above their historic medians. Manufacturing, construction wholesaling and retailing all were at percentile standings above 50%. However, the services sector standing at 26.0% is weak enough and the sector is important enough to hold the overall all-sector current conditions ranking at a 28.2 percentile standing.

The month in perspective What improved in the month were expectations. The all-sector expectations reading rose to -6.7 in April from -9.3 in March. There were improvements in three out of five of the sectors. Manufacturing improved, construction improved and retailing approved. Backtracking on the month were wholesaling that barely tipped lower to -26.3 from -26.2 and services that fell back to a 7.2 reading from a -4.0 reading in March.

The percentile standings for expectations are uniformly weak with only one reading among the five sectors is above its 20th percentile: in manufacturing with the 36.2 percentile standing. Construction has a 5.1 percentile standing, wholesaling an 8.2 percentile standing, services a 13-percentile standing, and retailing a 15.2 percentile standing.

The bottom line for the IFO is that climate improved marginally on the month as the current conditions index backtracked and its expectations logged a less negative reading. The percentile standings of the current conditions and the expectations components are for the most part still extremely weak. Within current conditions, two sectors have moderately strong readings and two others have moderately firm readings. But within expectations, all the readings are unequivocally and significantly weak. Comparing the readings in April 2023 to the pre-COVID January 2020 readings, we find very mixed results; the all-sector climate reading is better by only 0.9 points, the all-sector current conditions index is stronger by 12.7 points and the all-sector expectations index is stronger by just 1.6 points. Three sectors in expectations are weaker than they were in January 2020 and two are weaker on balance under current conditions. Climate is weaker for three sectors.

Summing up The IFO index in April is a mixed bag of mixed trends. It has the familiar result that current readings are scoring much stronger than expectations readings; we see that in other surveys that have current and expectation components. Inflation in Germany, and in the EMU, remains high as the ECB continues to raise rates. There is still a war raging just beyond Germany's doorstep between Ukraine and Russia. According to recent PMI data, the global statistics remain quite mixed with different performance trends coming out of the goods and services sectors. These cross currents are reflected in the German IFO survey as well.