German IFO: This is not what you would like to believe

On a final note, we want to give a gentle reminder on how to interpret data in this challenging period of time. Over the past few weeks, we have seen that many investors and even economists have misinterpreted post-lockdown indicators. It is of prime importance to remember that the improvement in recent statistics, such as the PMIs released yesterday, does not reflect any V-shaped recovery, but rather a deterioration at a slower rate in most cases. We could have talked about V-shaped recovery if the latest PMI were out close to 100, which was not the case. At best, it was slightly above the threshold of 50 – as was the case for France – which doesn’t scream booming yet.

The same problem of interpretation arises with customary diffusion surveys, like the ZEW or the German IFO that has been released today. Typical diffusion surveys only gives us a direction and a strength. Those questioned are merely asked to compare with how the current situation and expectations are relative the past month. Given the massive impact of the lockdown on the economy, it is not surprising that the assessment of the current situation and of expectations is improving, but this is mostly because it cannot really be worse – all the indicators are increasing from an utter stand-still. It is clear that we are only at the beginning of a very long process of normalisation for business and consumer confidence and that it will take at least another quarter to assess the shape of the recovery. We need to very be careful and avoid jumping to conclusions each time a new statistic is released.