Germany: Decline in IFO sentiment suggests growth is nearing its peak – Capital Economics

In view of Stephen Brown, European Economist at Capital Economics, February’s fall in Ifo business sentiment matches the message from other surveys that German GDP growth is nearing its peak, but the outlook remains bright.

Key Quotes

“The fall in the headline Business Climate Indicator (BCI) from 117.6 to 115.4 left it far weaker than the consensus forecast of 117.0 and at a five-month low. The survey breakdown showed that sentiment declined in each of the main sectors.”

“While the current conditions component fell from January’s record of 127.8 to 126.3, it was still higher than in December. The business expectations component fell by much more, from 108.3 to a 10-month low of 105.4. Weaker expectations could reflect a number of factors, not least the appreciation of the euro, signs of slowing demand from China and the drop in German equity prices earlier this month.”

“The headline BCI had previously looked consistent with a very strong pick-up in growth, but now “only” points to a slight rise in annual GDP growth from Q4’s 2.9%. An optimistic interpretation of this would be that February’s decline simply reflects the survey falling back in line with the long-run relationship with the official data and is therefore little cause for concern. A more pessimistic view would be that the Ifo is on track for its first fall in eight quarters in Q1 and the drop in expectations bodes ill for the future.”

“As is often the case, the truth is probably somewhere in between. On a long-run basis the decline in businesses’ expectations does not seem particularly concerning, with the expectations index still broadly consistent with annual GDP growth of around 2.5%. But the key take-away from the Ifo and other recent surveys seems to be that growth is unlikely to accelerate further Indeed, data released earlier this week showed that both the ZEW and Composite PMI softened in February.”

“Growth of between 2.5% and 3% would still be pretty strong. And once a government is formed, a small fiscal boost should help to ensure that healthy growth rates are sustained. We therefore maintain our above-consensus forecast for German GDP growth of 2.7% this year and 2.0% next.”