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

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  Following the improvement of the ZEW poll of financial market experts last week and the Sentix index early this month, all the IFO indicators have increased in June on the back of fewer restrictions on economic activity. Both investors and business leaders have the same judgement regarding the economic situation in Germany, which doesn't happen as often as you might think.


The IFO business climate index is out at 86.2 in June vs 85.0 expected and prior 79.5. The assessment of the current situation has also improved at 81.3 vs 84.0 expected and prior 78.9. Looking at business expectations, we also notice a strong increase to 91.4 vs 87.0 expected and prior 80.1. The rebound in all the three main indicators was largely anticipated by market participants due to the lifting of lockdown measures in Germany, which explains the rather muted market reaction to the release. Though social distancing remains in place and that isolated clusters are emerging here and there, notably in Lower Saxony and in the town of Rheda-Wiedenbrueck where more than 1,500 workers have been infected, the health crisis seems contained and well-handled by the authorities which tends to have a positive effect on businesses’ assessment of the current situation and of expectations. It is also likely that the rapid policy response to the economic crisis, via a €130 billion stimulus package, played a key role in the current improvement.

In the below chart, we have plotted the business situation and the business expectation indices since 2005 to create the IFO clock. It is composed of four quadrants: upturn (on the top left), boom (on the top right), downturn (on the bottom right) and recession (on the bottom left). We observe a major and expected improvement compared with last month, but it remains deeply in recession territory, at a level worse than in 2010. In other words, this is no time for celebration, there is still a long way to go before confidence is back.

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. 
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.