German October Ifo Business Survey Preview: Indicators predict recession

The Ifo Institute—Leibniz Institute for Economic Research at the University of Munich-will issue its report on German business sentiment at 8:00 GMT October 25^th, 4:00 EDT October 24^th.

Forecast

The Business Climate Index is predicted to decrease to 94.5 in October from 94.6 in September. The Current Assessment Index will drop to 98.0 from 98.5.  The Expectations Index will rise to 91.0 from 90.8.

Germany’s Ifo approaches recession

Business sentiments in Europe’s largest economy have fallen to their lowest levels since the financial crisis with the judgement on the current climate reaching the bottom in August and expectations following in September.

Germany’s export driven economy has seen a steep decline in optimism over the past two years that began soon after the start of the China US trade dispute in January 2018.

The overall business climate index fell from 117.6 in January 2018, a post-financial crisis high, to 102.1 that April and with a few minor recoveries has continued lower in the following 17 months. 

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The assessment of current conditions dropped from 127.7 that January to 105.7 in April, stabilized for the second half of 2018 then resumed a steady decline this year.

Expectations exhibit the same pattern.  The 111.0 peak came earlier in November 2017 and the initial plunge lasted longer reaching 98.5 in May 2018 but the result is the same. The September 90.8 score was the lowest since July 2009.

Markit PMI

Purchasing managers indexes (PMI) from Markit Economics of London second the dismal outlook.  The manufacturing PMI rose slightly to 41.9 in October from 41.7 the prior month but its remains far below the 50 demarcation for expansion and at the lowest since the depths of the financial crisis.

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Services have managed to avoid charting a contraction but at 51.2 in October it is also the weakest since the 2008-2009 recession.

The composite index had been more resilient but in September it fell into decline at 48.5, and barely improved in October at 48.6.

Factory orders and industrial production

German factory orders on an annual basis have declined for 15 straight months since May 2018. The figures have been negative for six of the eight reported months this year and eight of the last 12.  This is the longest run of contraction since the recession.

Annual industrial production is down for 10 months in a row and for five of the months this year through August.

German GDP

Economic growth was -0.1% in the second quarter after registering 0.4% in the first three months of the year.  With a second negative reading expected in the quarter just ended Germany may enter its first recession since 2008-2009. 

It missed an economic contraction in late 2012 and 2013 by the thinnest of margins. Growth declined 0.6% in the final three months of 2012 but was flat in the following quarter. The traditional definition of a recession is two quarters of negative economic activity.

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Conclusion

Germany’s export economy has been buffeted by the decline in global activity abetted if not prompted by the twin disturbances of the US China trade war and the still unknown economic consequences of the British exit from the European Union.

The increasing tempo of the declines in the German industrial, manufacturing and export sectors will result in an official recession when the third quarter GDP number are reported on November 22^nd.

A recession in Germany will very likely drag the rest of the euro area and its currency into decline.

The new president of the European Central Bank Christine Lagarde takes over on November 1^st.  A decade of ECB accommodative monetary policy has left her with very few options to fight the oncoming recession.