German Ifo Business Climate Disappoints for January

Alan Penny

27 January 2020

3 min read

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  • German Ifo is a leading indicator because of its huge sample size
  • 7000 businesses signal whether they plan to hire, spend or invest
  • Results came out lower than expected which came as a surprise

The German Ifo Business Climate announcement came out early Monday and didn’t live up to expectations. The survey is highly respected as it uses such a large sample size, and it also has a strong predictive quality as to what happens with the German economy. This in turn also has a major influence on the wider European Union.

The indicator itself is a leading one: companies give their opinions on business conditions and on whether or not they are looking at expansionary or contractionary conditions. It is particularly interesting because businesses tend to react to economic conditions much quicker than central banks or governments. They give their sentiment when it comes to the economic conditions, which also can be an early signal as to whether or not they will be spending, hiring, or investing.

The survey tracks roughly 7000 businesses in Germany and looks at the expectations for the next six months.

Announcement lower than expected

The announcement came in at 95.9, as opposed to the forecasted 97.1 reading. The previous number had been 96.3, and while the world was expecting the German business sentiment to improve, it has actually declined. That is a surprise that has weighed upon the euro currency and the stocks in Germany.

while the world was expecting the German business sentiment to improve, it has actually declined

As German business morale deteriorates, it brings down the outlook. Remember, Germany is over 80% of the economic power in the EU, so if things go poorly for the Germans, it has a major knock-on effect on the other EU member countries.

Some of the reasons stated by businesses included a lack of exports and the overall global slowdown. There has not been any effect as far as the coronavirus is concerned, but that will probably not help the situation either. The concerns around the fallout of Brexit were stated as well.

As things stand right now, it looks very unlikely that the European Union is ready to turn things around, which is truly disappointing considering that a lot of the economic indicators started to stabilize previously. It now looks as if we are starting to see further deterioration in confidence.

What traders will be looking out for

Going forward, it’s very likely that this will be one of a handful of economic announcements that traders will pay attention to.

The next release of the Ifo Business Climate number is on February 24, 2020. That will be greatly scrutinized, but there are several other concerns out there as well. Brexit headlines will continue to cause issues, just as the currency markets could. Currently, the euro is starting to lose value again, right along with certain stocks.

The ECB is looking to keep its monetary policy rather loose. Exporters may end up being one of the places to invest, but only if we continue to see the global economy pick up. Pay attention to international monetary flow because German exporters could be considered “cheap” if the global market shows.

Written By
Alan Penny

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