German Ifo Business Climate Index drops sharply

German Ifo Business Climate Index drops sharply

According to Hans-Werner Sinn, President of German  Ifo Institute, Sentiment among German businesses continued to weaken in February 2016. The Ifo Business Climate Index for German industry and trade fell to 105.7 points this month from 107.3 points in January, marking its third consecutive decrease. The majority of companies were pessimistic about their business outlook for the first time in over six months. Assessments of the current business situation, by contrast, were slightly better than last month. German businesses expressed growing concern, especially in manufacturing

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In manufacturing the business climate index fell sharply. Manufacturers’ business expectations declined steeply, marking their largest downswing since November 2008. Assessments of the current business situation, by contrast, improved somewhat. This pattern of declining expectations and an improving current business situation emerged in several branches of manufacturing. With production levels falling at the end of last year, manufacturers fear that the downturn will continue.

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In wholesaling the business climate index fell. While wholesalers scaled back their very good assessments of the current business situation, their business expectations remained fairly optimistic. The business climate also deteriorated in retailing. Assessments of the current situation were good and remained almost unchanged. After brightening last month, retailers’ business expectations, by contrast, clouded over.

Construction was the only sector in which the business climate index rose. This was due to assessments of the current business situation, which hit a new record high. Business expectations, on the other hand, deteriorated for the fourth month in succession.

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The Ifo Business Climate Index is based on ca. 7,000 monthly survey responses from firms in manufacturing, construction, wholesaling and retailing. The firms are asked to give their assessments of the current business situation and their expectations for the next six months. They can characterise their situation as “good”, “satisfactory” or “poor” and their business expectations for the next six months as “more favourable”, “unchanged” or “more unfavourable”. The balance value of the current business situation is the difference between the percentages of the responses “good” and “poor”, the balance value of the expectations is the difference between the percentages of the responses “more favourable” and “more unfavourable”. The business climate is a transformed mean of the balances of the business situation and the expectations. For the purpose of calculating the index values, the transformed balances are all normalised to the average of the year 2005.

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Monthly movements of the Ifo Business Climate Index for Industry and Trade can be transformed with the help of Markov Switching Models into probability statements for the two cyclical regimes expansion or contraction. The Ifo Business Cycle Traffic Lights provides the monthly regime probabilities for the expansion phase. The probabilities signal an economic expansion (green lights) insofar as they exceed the 66% mark; contractions insofar as they are under the 33% mark (red lights); or indifference (yellow lights) when in the range in between. This indifference interval can be interpreted as a buffer zone between the regimes expansion and contraction, in which particularly great uncertainty exists about the state of the economy.

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