IFO Shows Widespread Rebound; Some Readings Still Lag Their Pre-Covid Values

The IFO business index climate readings all improved in February; the aggregates improved for current conditions and expectations as well. In fact, the lone monthly set back was to expectations in the construction sector.

Climate readings stand above their pre-Covid (January 2020) level overall for manufacturing and in wholesaling. It is hard to see where the rebound has come from since it is not in any obvious way virus-related. In Germany, the infections rates continued higher through January, peaking in the second week of February and coming down slowly. The death rate curve, which is known to lag., reached a local low point in late-January and early-February but has since risen slightly. So the German revitalization either represents some autonomous increase in activity or it reflects less fear of the virus by the German population. The services reading for Germany in climate, current conditions and expectations all stepped up on the month, but also rising sharply was the Markit reading on the services sector. This is the sector that tends to respond the most to changes in the virus and we can expect that it also will be the litmus test for economic responses drive by changes in attitudes toward the virus.

However, retailing, while improving, is also a lagging sector in the IFO framework that needs to improve to play catch-up. This limits the conclusion that the changing attitude on the virus may be driving these responses. Retailing climate did gain substantially month-to-month, but current conditions only made a modest rise (one tenth of a tick higher, rising to -1.2 in February from -1.3 in January) while the expectations reading pushed strongly higher rising in February to -5.5 from -16.9.

There are two concepts at work here. One is the assessment currently of the change month-to-month. The other is the historic standing of activity levels in the various sectors. Overall, the standings show climate at a solid 78.5 percentile mark while the current standing is at its 51.2 percentile and expectations are only at their 51.7 percentile. The climate reading is quite solid by itself while the current and expectations readings are only at a thin margin above their respective median values on data back to 2005. The current standings for retailing and services are below their median with readings of 42.0 for retailing and 25.4 for services- their respective historic median occur at rankings of 50.0. Thus, both of these show below-par readings. Wholesaling and construction show solid/strong readings with construction at an 87.8 percentile standing and wholesaling at a 91.2 percentile standing. Manufacturing, once the strongman of this series, has a still solid reading at its 76.1 percentile.

If you wonder where German businesses think they are going, apparently, they wonder too. Their overview ranking is only at the 51.7 percentile mark, just tad above its median (on data back to 2005). The outlook is weighed down by three standings below their medians: a 20.5 percentile standing for construction, a 34.1 percentile standing for services and a 35.6 percentile standing for wholesaling. Boosting expectations above the 50 mark that represents its median is the 58.5 percentile standing for retailing and the 68.3 percentile standing for manufacturing. The 'bad news' here is that no expectation reading is higher than its 68th percentile which suggests that there is no real pent-up optimism. There is some optimism but no significant optimism. And this, even though there are signs of the virus slowing, being less lethal, and putting fewer in the hospital.

Over one, two and three months, climate readings have improved on back across all sectors as well as for current conditions and business expectations in the aggregate. But over four, six, seven and eight months, there are sector declines as well as mixed declines for the current and expectations indexes.

We are waiting to see how Europe, Asia, and the U.S. 'dig out' the wake of the widespread Omicron infection cycle and how growth will progress. Since it is already late-February, we are looking at a period that will lead into spring summer and hopefully proved a natural extension to a period of warmer weather, more outside activity, and lesser infection. And as that happens, growth should be able to reassert and cement itself. But it is really uncomfortable making economic projections on the back of assumptions about a virus that has been as hard to predict as this one even though epidemiologists themselves are starting to become more optimistic. I have yet to find a bank that will allow optimism to be put on deposit and earn interest on it.