German IFO Gauges Take a Further Tumble

Germany’s IFO survey for August saw persistent deterioration in its headline readings as well as most principal components compared to their July values. The all-sector climate reading in August fell to -21.5 from -19.7 in July. Under current conditions the all-sector reading fell from -1.5 in July to -3.0 in August. For expectations, the August value fell to -18.0 from -17.6 in July – a trifecta of deterioration.

Rankings take a spanking In addition to these month-to-month deterioration in the three main readings of the IFO index for climate, current conditions, and expectations, the ranking of each of these - of course – slipped. The rankings remain extremely low. For climate, the all-sector ranking fell to 9.5% from 12.9%. For current conditions, the all-sector ranking fell to 10.6% from 11.9%, a month ago. For expectations, the ranking fell to 13.1% from 24.0%, one month ago.

Sector readings are low and deteriorate Weakness is deep, broad, and pervasive All the major aggregate sector readings for the IFO in August lie below the 15th percentile which makes them all exceptionally weak. The interpretation is that they have all been this weak or weaker less than 15% of the time. Sectors get individual rankings in each of the functional survey areas. With five-sectors in each of the three-categories, there are 15 different rankings in the table apart from the overall rankings for the all-sector aggregates. Across these 15 rankings only one of them, for construction, under the current conditions section, has a standing above its 50th percentile. That reading puts its August value above its median value for the period back to late 1991. All the rest of the sectors are below their respective 50th percentiles (and below their respective medians). The second strongest ranking is a 35-percentile standing, again, for construction, and this time in the climate category. The weakness in Germany is deep, broad, and pervasive.

Sector step-backs In the climate section the average step-back for the monthly (up-minus-down) diffusion readings is a step-back of one point for August compared to July. In August only one of the current readings improved compared to July and that was for retailing where the August reading moved up to -23.1 from -25.4 in July. Under current conditions there's only one reading that improves month-to-month, and again that is retailing that improves to a reading of -15.8 from -16.3 in July. Under expectations, there are two readings that improve month-to-month, the reading for wholesaling in August moves up to -30.8, an improvement from -31.4 in July; the reading for retailing moves up to -30.2 from -34.1. Apart from these readings all sectors deteriorated in August compared to July in all three functional categories. In addition, all the August readings have net negative diffusion values except for the services sector under current conditions where the August reading is at +12.3 which is a decline from +13.4 in July. And, even at that, the services reading has a 16-percentile standing under current conditions.

Graphic weakness... The chart also shows what the deterioration has been like across sectors though time in the IFO survey. The low point in this survey (apart from the recent Covid spike low) for many of the components came in late 2023 early 2024. Since then, there has been a minor rebound in play. However, over the last few months that has been unwinding and there's been another miniature down cycle developing.

The IFO reading and the global eco-picture The state of the world economy remains in flux and, of course, the German economy that is plugged into the international economy and depends greatly on manufacturing and significantly on international trade, continues to be under a great deal of pressure. Central banks around the world have either entered or are preparing to enter the twilight-zone of easing cycles with the exception of the Bank of Japan where inflation had been more consistently low, and where the central bank is now trying to reestablish interest rate normalization; it recently conducted its second-interest rate hike within the last month. The ECB kicked off the easing cycle early but has not followed up with a second reduction in rates. The Bank of England recently executed a more controversial rate reduction that was followed up by comments from their chief economist warning that the next rate cut may not come for some time. Just this past weekend, in Jackson Hole Wyoming, the Federal Reserve had a conference and heard its Chairman, Jay Powell, declare the time had come for the Fed to begin to embark on an easing process and to join the easing moves that have been engaged by in by central banks overseas. However, the timing and magnitude of the Fed’s move remains speculative.

Inflation – as always- holds the key The key point in all of these is that inflation which had accelerated during COVID and in the wake of the Russian invasion of Ukraine, since has slowed. But, in several places, that decline in inflation has either slowed dramatically or inflation appears to have become stuck at a pace above the target that central banks have established for inflation, which for all of them is at 2%. That reality creates a problem in terms of the outlook for markets that had been looking for a program of continued cuts as central banks to followed through on their rate reductions. But central banks have been looking for inflation to continue to fall. Inflation’s stubbornness has brought to a halt to the global cycle of rate cuts. That might be one of the factors explaining why improvements in the German IFO survey are also in the process of backtracking. The outlook is still mixed. Most still see central bankers cutting rates ahead. Yet, most rate cut profiles had been cut back, as inflation reduction stalled. But now expectations for rate cuts may step up again with the new outlook from the Federal Reserve in the US.