Germany’s IFO Gauge Improves Broadly...and Breadth Is Not Strength

Germany's IFO gauge for climate improved to -4.3 in February from -7.3 in January. The current all-sector index deteriorated slightly to 14.0 in February from 14.4 in January, but that deterioration was wholly because of a deterioration in the manufacturing sector; every other sector improved on the month. Expectations improved with the all-sector expectations index moving to -14.5 in February from -18.9 in January; there were improvements in all sectors, on the month. However, every single sector continues to have a net negative expectation reading. While there is some improvement and, while there is broad improvement, the IFO index only represents improvement from an extremely low level to a slightly less weak level. As an example, the all-sector expectations index has a queue standing at its lower 10th percentile; the all-sector current index has a standing in its 23rd percentile; and the overarching climate index has a standing in its 19th percentile. Any percentile standing below the 50-percentile mark is a standing below the median for that measure on data back to 2005.

On a shorter timeline comparing the February values to their respective levels back in January 2020 before COVID struck, we see declines for all of the measures except for manufacturing. That sector is slightly stronger on its climate, on its current, and on its expectations readings. For manufacturing, all of those changes are positive whereas for all of the other components all of those changes are negative. Since COVID struck, all sectors of the German economy have had a very difficult time getting back into gear.

The current-situation gauge shows rampant weakness with all sectors having queue rank standings below their 50th percentile except for construction. Construction has a 64.4 percentile standing; however, the retail sector is close to the 50-mark with a 49.5 percentile standing. The next closest is wholesaling, at a 40th percentile standing. Manufacturing, even though it has risen from its January 2020 level, still has only a 29.6 percentile standing. Services have only a 22.7 percentile standing. In terms of the current indexes, the assessments by participating in firms in the survey show continued weakness compared to historic performance.

The IFO expectations survey shows net negative readings up and down the line; all of them improved month-to-month. The queue rank standings for all of these are weak, below their 15th percentile for all industries except manufacturing that has a ‘whopping’ 19.4 percentile standing. The weakest sector response is from construction with a 3.7 percentile standing; services have an 8.3 percentile standing. Compared to January 2020, all of the readings are weaker except for manufacturing as noted above.

Summing up Even though there is widespread improvement and the IFO readings with improvement in all the expectations and improvement across all the current indexes except for manufacturing, it's hard to be too upbeat because the sector evaluations are also low. The expectations responses are all simply extremely weak even with the monthly improvements. The current responses are broadly below average and, in many cases, quite substantially below what have been their median values. The German economy is still digging out and the Covid and post-Covid problems experienced by the economy appear to still be very broadly felt even though there was a broad but small improvement on the month.