Germany: Ifo sentiment seen weakening on Iran war – Commerzbank

Commerzbank economists Christoph Balz and Ralph Solveen expect the Ifo Business Climate Index to slip from 86.6 to 86.0 in August as renewed Iran war concerns and higher energy prices weigh on expectations. They note sentiment remains fragile despite limited impact on current activity so far, and warn that supply chain issues from low river levels could add pressure, even as “hard” data stay relatively resilient.

Ifo expectations deteriorate while activity holds

"The Ifo Business Climate Index is likely to have fallen again in August, as hopes held by some a month ago for a swift end to the war in Iran were dashed and energy prices have once again risen significantly. In the short term, however, the more important question is whether these pressures are also reflected in the assessment of the current business situation."

"Next week, the Ifo Business Climate Index will once again provide a snapshot of sentiment among German companies. We expect sentiment to have deteriorated somewhat, with the index falling from 86.6 in July to 86.0 in August. This is because many companies were likely still influenced by the interim agreement between the U.S. and Iran – and the resulting sharp drop in energy prices – when they responded to the July survey."

"By now, however, many are likely looking to the future with renewed skepticism, so anything other than a decline in business expectations would be a (positive) surprise. Supply chain issues resulting from low river levels could also contribute to this."

"In our view, what is more interesting than expectations is how companies assess the current business situation. The corresponding subcomponent of the business climate has, on balance, hardly changed since the start of the war in Iran – just as it did the year ago – suggesting that the impact of higher energy prices on companies’ operations has so far been limited. We assume that nothing significant has changed in this regard in August either, but the uncertainty here is significantly greater than with expectations."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)