Germany: IFO Confidence Weakens Further on Poor Expectations; Move to Recovery Is Reversed

Germany's IFO survey had been engaged in an ongoing improvement, but this month there's a clear step back from that improving trend. The all-sector climate index from the IFO registers a reading of -15.3 in June, weaker than May’s -11.4 reading. The current conditions reading is a net positive, but it is unchanged month-to-month. However, expectations show an index value of -13.4 in June, below the -10.7 logged in May. That is very disappointing.

Business expectations have been improving since January. This is the first backtracking in that improving stretch. The reading of -13.4 for June brings it back to a level that is stronger than the reading for March but weaker than the reading for April.

Climate The overall climate reading weakened month-to-month. It shows slippage in manufacturing, wholesaling, and retailing. There's an improvement in services to plus 4.2 in June from plus 1.8 in May and there is a more modest improvement in construction to -25 in June from -25.6 in May. However, there is also sharp deterioration from month-to-month, with manufacturing falling to -9.2 in June from -6.5 in May, wholesaling falling to -26.7 in June from -19.8 in May, and retailing falling to -19.5 in June from -13.3 in May. Despite the significant improvement in services, there is deterioration elsewhere that dominates the climate reading this month. The rank standing for overall climate this month stands in its 20th percentile at the cusp of the lower 1/5 of the historic rank of all its observations. The weakest reading is wholesaling with a 12.6 percentile standing. The strongest sector is construction with 37.9 percentile standing. After its rebound this month, services moved up to a 22.6 percentile standing from 19.6% a month ago. Still, all of these are weak readings and not even marginally weak readings- all are well below their historic median that occur at a ranking at the 50th percentile.

Current The current reading is unchanged month-to-month at a positive reading of plus 1.2. It derives its positive reading and strength from the services sector where the current reading moved up to 14.0 in June from 11.8 in May. Manufacturing improved month-to-month, moving to -6.1 from -6.6 in May. The construction sector moved down to -17.1 in June from -16 in May, retailing fell to -7.1 in June from -2.2 in May, while wholesaling fell to -25.2 from -18.2 in May. Current conditions overall are unchanged on two improving sectors and three deteriorating sectors. The current index ranks weaker than the climate index with a 15-percentile standing overall; however, current conditions show two sector readings with percentile rank standings above their 50th percentiles, putting them above their historic medians. Those sectors are construction with a 54.9 percentile standing and retailing with a 59.5 percentile standing. Manufacturing has a 27.6 percentile standing while both wholesaling and services have a 19.1 percentile standing.

Expectations The expectations readings are what sinks the IFO survey this month. The all-sector reading falls to -13.4 in June from -10.7 in May. There are month-to-month improvements in services, but they log -5.2 in June compared to -7.6 in May and in construction that logs a -32.7 reading in June, up from -34.7 in May. However, manufacturing drops sharply to -12.3 in June from -6.4 in May, wholesaling drops significantly to -28.3 in June from -21.5 in May and retailing falls to -31.1 in June from -23.8 in May. Rankings show the all-sector expectations index with a 14.5 percentile standing, construction has only an 8.5 percentile standing, and retailing an 8-percentile standing. These are the two weakest sectors in expectations, and this contrasts sharply to their performance in the current index where they are the two strongest readings and the only ones with readings above their historic medians. On Expectations, wholesaling has a 10.3 percentile standing, manufacturing, an 18-percentile standing, and services, an 18.7 percentile standing.

Sum-up The IFO index is permeated with weakness both in terms of the absolute rankings of the sectors over the different climate metrics as well as the changes month-to-month. Expectations had put a nice run of improvement in place that has rolled over this month; this must raise some questions about why that happened, since the ECB has cut rates and offered a benign statement in place for its future activity. Globally the environment is improving in the sense that central banks are backing off their rate increases, and some are already embarked upon either a plan or a course of easing rates. We would usually expect that to have its biggest impact on expectations, but here we see expectations are being peeled back. The setback in the IFO this month is unexpected and it's not good news. The reason for it is elusive, but it does come in the wake of the gains by the right in the EU parliament elections.