The August IFO survey shows an unexpectedly sharp decline in economic sentiment, suggesting, as did the softer flash PMI survey Tuesday, that after hesitating in July, Brexit negative effects may be arriving after all.
Contrary to expectations of a small increase, the headline business sentiment indicator fell more than 2 points to 106.2, the second monthly loss in a row and the lowest reading since February. The deterioration reflected 2 point losses in both sub-indexes, with current conditions falling to 112.8, the lowest level since January, and business expectations to 100.1, the lowest level since February.
At a sector level, morale was down in most areas, particularly in retailing, which fell 7.7 points to 2.5, the lowest mark in over a year, and in wholesaling, down 6.2 points to 5.6. Manufacturing fell 3.3 points to 6.3, a 5-month low, and trade and industry as a whole were down 4 points on the month at 5.6, a six month low.
On a dim bright note, business climate in construction managed to retain July record high levels and was flat on the month at 5.4, with the current situation assessment weakening slightly but expectations slightly more optimistic.
Today's results confirm and specify the softness registered in Tuesday's PMI survey flash report, where the composite eased by nearly a point to 54.4 and services fell to 53.3, a 15-month low. The growing evidence of deterioration of business sentiment within the strongest economy of the euro area suggests that a more pronounced slowdown of growth may lie ahead for the Eurozone as whole, and is likely to put the ECB on alert as demands to deliver another round of easing at its September meeting become even more vociferous.
Published by Munich's Ifo Institute, the Business Climate Index is closely watched as an early indicator of morale in German industry. In addition to overall gauge of sentiment, data are provided on its two components, current conditions and expectations. As a forward looking indicator, the latter is normally seen as the more important. Ifo surveys more than 7,000 enterprises in manufacturing, construction, wholesaling and retailing and a separate estimate of sector confidence is supplied for each.
The headline index has a good correlation with developments in overall GDP and so has a major influence in shaping views on how the national economy is performing. The main focus is the expectations index. It is generally published during the last week of the month for the current month with more detailed information available about a week later.