Head of Macroeconomic Research
Summary: The German IFO for February continues to move upward. This confirms the momentum for the German economy is improving in Q1. The potential economic impact from the Russo-Ukrainian crisis is likely to remain limited, at least in the short term.
Improving outlook: Sentiment in the German economy has improved noticeably in February. After a positive reading in January (96.0), the Ifo Business Climate Index rose to 98.9 this month (see – Chart 1). Companies are betting on an end to the coronavirus crisis. The uptick continues to be driven by the expectations for the next six months – which jumped to 99.2 in February from 95.8 in January. Recent surveys have confirmed the positive momentum of the German economy – think the German preliminary PMI for February for instance. The German economy is still operating below its potential. But the stage is set for an improving outlook over the course of Q1, and perhaps over Q2. Household balance are strong and companies are satisfied both with the current situation and the expectations.
Upturn across key sectors: The business climate in manufacturing rose to 23.5 in February from 20.0 in January (see – Chart 2). In this sector, both the current conditions as well as the expectations component improved. However, manufacturing is still exposed to supply shortages and dislocations in international shipping, with material shortage hampering production. Business climate in construction also improved, from 8.0 to 8.3. Construction was never hit that hard by the pandemic and was operating close to capacity during most of the recent period. Finally, the business climate for both the services and trade increased too (to 13.5 in February from 7.7 in January and to 6.6 from -1.3, respectively). The strong rebound in the services sector is explained by the end of most COVID restrictions in February (see- Chart 3).
Little to no impact from the Russo-Ukrainian crisis: The February poll was filed before the intensification of the Russo-Ukrainian crisis, especially before reports emerged of Russian troops rolling into eastern Ukraine. The latest events will undoubtedly increase uncertainty in the short-term. But the economic impact on Germany is likely to be limited, unless the EU commits to tough and widespread sanctions against Russia’s energy sector, for instance. This is unlikely at that stage. Several major EU members (Austria, Italy and Germany) are favoring a targeted approach with less negative economic implications for the EU.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
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