January Germany IFO Business Climate Index

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The big event scheduled on the economic calendar for Europe on Friday is the release of the IFO business climate survey at 04:00 EST (or 10:00 CET). This data could get a little extra attention this time around because of the economic situation in Europe.

Analysts are currently trying to get some forward visibility on what we might see with the GDP numbers, expected to be released in mid-February.

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The Survey

The IFO part comes from the Munich-based think tank that does the survey (which is why there are several data releases that are called IFO). It’s a monthly survey of 7,000 of the largest businesses in Germany about how they see their business doing in the next six months.

The index is compiled by calculating the number of positive and negative response, setting 100 as the separation between growth and contraction. A result above 100 means the majority of businesses have a positive outlook, while below means most businesses have a negative outlook.

The index is split into three components which help evaluate the business sentiment evolution over time. Because the outlook is always timed for six months in advance, tracking the evolution of the index over time allows for constructing a path of expectations for each of the next six months.

Expectations

Current Assessment

As the name suggests, the curernt assessment is an evaluation of the current business situation. This indicator has fluctuated around the 105-106 level, after taking a significant drop in April. Although this is positive, it is only barely so as it is the lowest result since the eurozone came out of the subprime crisis. In fact, even during the 2011 crunch it didn’t drop this low. Current expectations are 104.2, a further slip from the 104.7 recorded last month.

Expectations

The expectations are the part that investors pay most attention to, which is where businesses expect to be in six months. Generally, this number is depressed, since the executives are factoring a certain degree of uncertainty. It’s not uncommon for this number to drop below 100 for a few months. It has been negative since October and continues to move lower. In fact, expectations are for 97.0, a further drop from the 97.3 recorded last month.

Business Climate

The business climate is basically an aggregate of the two prior numbers, and it’s what the market pays the most attention to. Beginning in early 2016, the indicator started a multi-month climb to reach a decades-high of 117.6, only to take a precipitous dive in April remaining just barely positive for the rest of the year. Consensus is for 100.6, also a further drop from last month’s 101.0.

Considerations

Several factors are weighing on business sentiment. That drop in April is due to something that is still very much a concern: the trade situation, and the potential that the Trump administration will put tariffs on vehicles from the EU, mainly affecting Germany.

The question that is on most people’s minds is whether Germany, the largest economy in the eurozone, has slipped into a technical recession in the last quarter, and business sentiment is a good gauge of how the economy is performing. It should be noted that last month’s business sentiment was the worst since the 2012 technical recession.

It’s not just Germany, of course, since most of the largest German firms do business all across Europe, and a drop in outlook would be reflective of the entire area.

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