27/8/2013: Ifo Business Expectations: Germany, August 2013

On foot of my previous post (http://trueeconomics.blogspot.ie/2013/08/2782013-ifo-business-climate-survey-for.html), here is a longer-term view of the role expectations play in co-determining / tracking the subsequent realisation of business conditions and climate under the Ifo index.

Answer is: not much. The same picture holds for 12 months lags.

In other words, as I said above: expectations (in the case of German businesses) are more conservative and less volatile than either current situation index or climate index. And this suggests that expectations tend to adjust to current climate imperfectly but stronger than lead the future index readings. For the forecasting purpose, it is probably the longer-run averages, in more complex econometric structures, that are more likely more indicative of the true underlying dynamics being declared under the expectations. In simple terms: don't read too much into short term changes (short-term being 12 months and less) in expectations...

Interestingly, the Ifo series are high quality data, unlike many other series, such as, for example, smaller economies' PMIs. Yet, to my knowledge, no one does any serious analysis of expectations and their predictive power for any of the regularly-released series on business activity. This just goes to show how simplistic the markets-related macro analysis can be.