Economy in Brief

The GfK reading dropped to a seven-month low, a fall of 4.9 points month-to-month, the 8th largest month-to-month drop in the last 20 years.

In May 2022, the GfK index fell sharply from a level of -15.7 to -26.6. From that point, the reading migrated down to levels as low as -42.8, but it's continued with only a few exceptions to remain at readings of -20 or lower during this period. November 2024 had logged only the second reading that was stronger than -20 during this long episode at -18.4. But now the climate reading is back to -23.3. The German economy is struggling without any clear new shock to blame it on. The two shocks responsible for sending GfK confidence into such a tizzy were, of course, the arrival of COVID and the government response to that pandemic, and then Ukraine's invasion by Russia. The COVID and Russian episodes brought on a surge of global inflation. Globally, central banks are still dealing with it. Inflation continues to linger at a too-high level and the European Monetary Union, although the ECB has been reducing rates steadily and is focused on trying to stabilize the economy and as well as to be mindful of its 2% inflation target.

The global situation has resulted in the unseating of many governments around the world including in Germany. This disruption extended to a long-standing domination of politics by the LDP in Japan. These circumstances are causing many governments around the world to blame their ouster on global economic conditions rather than to engage in self-introspection necessary to reconstitute their political parties. Time will tell how the new arrangements are going to work out. In the U.K., the new government is already floundering. The Jury is out on what Germany’s new administration will do. One thing will be to interact with a new more forceful president in the United States.

The GfK confidence/climate measure provides indications for economic and income expectations as well as an assessment of the propensity to buy environment. The components of the GfK index lag by one month so we have observations for these metrics in November. In November, each of these 3 readings drops and negative readings are recorded for all of them. Income expectations fall the most sharply month-to-month. The queue-percentage or count-percentile standing of the climate index overall is in its 9.5 percentile that tells us it has been this weak or weaker 9.5% of the time historically. The economic gauge has been this week or weaker 29.7% of the time, income expectations have been this weak or weaker 28.5% of the time, and their propensity to buy has been this weak or weaker 30.8% of the time. Conditions across these metrics are consistently weak coalescing around lower 30 percentile standing, which, of course, is a poor result. There is a significantly lower standing for the overall climate gauge; that is reflective of the fact that these three gauges are not usually this weak at the same time. The combination of these three low rankings help to push the overall climate reading even lower.

We also present in this table data on confidence for Italy, France, and the United Kingdom. U.K. and French data are up to date as of November (the same as the components for the GfK index), while Italy lags two months. Italy’s most recent observation is for October. The queue- or count-percentile standings show France, and the U.K. are low and similar to the standings of the components of the GfK index. The U.K. standing is at its 32.8 percentile and the French confidence measure is at the 45th percentile. In Italy, the ISTAT index of confidence has a 77-percentile standing, leaving it much stronger in its historic range. When we look at standings, any metric below the 50% mark is below its historic median; all of these measures are showing below-median values except for Italy.

On balance, it's a very disappointing report from GfK. It is not surprising because other economic data have remained weak, particularly for Europe, and for Germany during this recent period. The GfK reading is a look-ahead reading for December. As such it's our first reading/projection for December and it isn't good news.