24/4/15: Business Climate: Germany and Euro Area 1Q 2015

The Ifo Business Climate Index for German trade and industry rose to 108.6 points in April from 107.9 points last month based on the latest data. Using historical time series, current reading signals growth in excess of 2%.

However, Q1 2015 was relatively weak for German indicators.

Present situation index for Germany in Q1 2015 was 112.0 against 115.2 a year ago. Expectations for the next 6 months index was 103.9 in Q1 2015 against 106.3 a year ago. Economic Climate index - overall index of activity - in Q1 2015 stood at 107.9 down on 110.6 in Q1 2014.

German performance in Q1 2015 was reflective of a similar trend in the euro area. Euro area present situation index in Q1 2015 was at 117.5 - well below 120.3 recorded in Q1 2014, while 6months forward expectations index was at 109.8 against 119.7 a year ago. Overall, euro area economic climate index finished Q1 2015 at 112.7, which was below 119.9 recorded at the end of Q1 2014.

Unless April reading signals sustained uplift for Q2 2015, things are not exactly exciting.

13/6/2013: Boom-time in German Building Industry?

Ifo published some new survey data on German economy. One that jumps out is the Architects Survey. Per Ifo (emphasis mine): "The business climate improved significantly at the beginning of the second quarter of 2013 and has not been as favourable since the German reunification boom at the end of the 1990s, according to the remarkable results of the Ifo Institute's quarterly survey of freelance architects."

Freelance architects "assessed their current business situation as significantly better than in previous quarters and business expectations have also improved compared to last quarter's assessments. 

• The share of architects surveyed who described their cur-rent business situation as "good" increased from 41% to 43%. 
• Business expectations also improved compared to last quarter’s assessments. The share of partici-pants that expressed scepticism about the future fell considerably from 16% to just 10%. 
• 57% of the architects surveyed signed new contracts in the first quarter of 2013. 
• Number of new contracts for detached and semi-detached houses in Q1 2013 is the same as in Q4 2012 - at a level that is almost twice as high as the low point reached in 2006 and 2007.
• Total number of new orders for the planning of multi-family buildings in Q1 2013 was around 150% higher than the figure just six months previously.

It's a boom-time in Germany and Angela might be feeling a bit more confident, assuming the euro news are not too bad come elections...

28/4/2013: That German Miracle...

Germany... the miracle economy of Europe:

Let's do some growth facts. recall that G7 includes such powerhouses of negative growth as Japan and Italy, and the flagship of anemia France.

1) Germany vs G7 in real GDP growth:

From data illustrated above:

• In the G7 group, Germany ranked 6th in growth terms over the 1980s, rising to 5th in the 1990s and 2000s, and, based on the IMF forecasts, can be expected to rank 4th in the period 2010-2018. In simple terms - Germany ranked below average in every decade since 1980 through 2009 and exact average in 2010-2018 period.
• On a cumulated basis, starting from 100=1980, by the end of this year, judging by latests IMF forecast for 2013, Germany would end up with second slowest growth in G7, second only to Italy. 
• On a cumulated basis, starting from 100=1990, by the end of this year, judging by latests IMF forecast for 2013, Germany would end up with fourth fastest growth in G7. Ditto for the basis starting from 100=2000.

2) Germany vs G7 in annual growth rates in GDP based on Purchasing-power-parity adjustment (PPP) per capita to account for exchange rates and prices differentials:

From data illustrated above:

• In the G7 group, Germany ranked 5th - or below average - in PPP-adjusted per capita growth terms over the 1980s and the 1990s, rising to 4th - group average - in the 2000s, and, based on the IMF forecasts, can be expected to rank 3rd - slightly above average - in the period 2010-2018. In simple terms - Germany ranked below or at the average in every decade since 1980 through 2009 and one place ahead of the average in 2010-2018 period.
• Note: Germany is the only G7 country with shrinking overall population, that peaked in 2003 and has been declining since, thus helping its GDP (PPP) per capita performance.

Here's the chart summarising Germany's rankings in G7 in terms of two growth criteria discussed:

Germany might have been performing well in 2006 and 2011 (when it ranked 1st in real GDP growth terms) and really well in 2007-2008 and 2010 when it ranked 2nd, but other than that, it has been a lousy example for any sort of a miracle.

22/02.2013: A small cloud over German economy's silver lining

Released today, the Ifo Business Climate Index for German industry and trade "rose significantly by over three points in February. This represents its greatest increase since July 2010. Satisfaction with the current business situation continued to grow. Survey participants also expressed greater optimism about their future business perspectives. The German economy is regaining momentum."

These are positive news for the German economy and it needed some cheer up. But, alas, good news, like every proverbial silver lining, do come with small clouds attached. Since I am not in the business of spinning the same story as everyone else, I will focus on some of these clouds in the note. You can read the actual press release and see data here: http://www.cesifo-group.de/ifoHome/facts/Survey-Results/Business-Climate/Geschaeftsklima-Archiv/2013/Geschaeftsklima-20130222.html

Good stuff: "In manufacturing the business climate indicator rose sharply. This was specifically due to a considerably more optimistic business outlook. Manufacturers also expressed greater satisfaction with their current business situation. Export expectations increased and are now above their long-term average once again."

"In construction the business climate index continued to rise sharply, primarily due to a far more optimistic business outlook. The business outlook reached its highest level since German reunification. Satis-faction with the current business situation also continued to grow."

Truth be told, in the industrial sectors, the entire rise in the index can be explained by the above two sectors, with wholesale and retail sectors staying at and below the zero mark (respectively). Internal economy seems to be still in poor shape, although the rate of decline clearly dropped in wholesale sector, whilst accelerating in the retail sector.

In services, business climate also rose impressively, but the entire increase was due to business expectations, while the current situation assessment deteriorated.

What worries me more is the headline indices for all sectors.

• Business Climate index rose to 107.4 in February 2013 - up +3.0% m/m, but it was down 1.9% y/y. 3mo average through February 2013 is at 104.7, up on 101.0 3mo average through November 2012, but down 3.4% on the 3mo average through February 2012.
• Business Situation improved much less dramatically and is lagging well behind overall climate reading. The sub-index on current situation rose to 110.2 in February 2012 (+1.9% m/m), but is down 6.1% y/y. 3mo MA through February 2012 is down 7.2% y/y.
• As the result, most of the gains in the overall Climate reading were due to, yep, expectations of future changes. Expectations rose to 104.6 in February, up 4.0% m/m and up 2.3% y/y. Expectations were also up on 3mo average reading +0.6% y/y. 

The latter point is problematic. You see, expectations surveys of businesses are often more indicative of the direction, rather than of the magnitude, of future changes. And so is the case with the Ifo index.

Per chart above, whilst current conditions are strongly correlated with the business climate in the same period, it turns out that future expectations are much more strongly linked with current climate (and conditions) than with what they are supposed to predict - namely, future conditions. In fact, the same result holds regardless of whether we choose a forward lag on expectations 6mo out or 12mo out. There is simply no connection between m/m changes in reported expectations and the future business climate realisations.

So, while we sound victory trumpets around the headline 'strong rise' in the Ifo index, we should be aware of the fact that most of this rise is indeed being driven by highly suspect expectations.

But wait, things are even worse than that. Take a look at historical volatility in indices. Based on two standard deviations metrics (sample and population), m/m changes in sub-indices post historical standard deviations of 1.4 for Business Climate, 1.7-1.8 for Business Conditions and 1.7 for Expectations. Which, basically, means that 3% rise in headline index was basically statistically indifferent from zero change, and likewise was 1.9% rise in Business Conditions index. Only the 4.0% hike in Business Expectations was possibly statistically significant.

So here wi have it - the most questionable in quality indicator was the most influential driver of the February gains and was also the most likely candidate for being statistically distinct from zero in terms of its m/m expansion.