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.

27/8/2013: Ifo Business Climate Survey for Germany: August 2013

CES Ifo Business Climate figures for Germany are out today, showing further gains in underlying economic conditions and expectations forward.

Year on year, business climate index reading improved 5.2% to 107.5 in August 2013, with monthly improvement of 1.2%. 3mo average over the last 3 months was 106.5 against 105.6 average for the 3mo period through May 2013 and 103.5 3mo average through August 2012.

On business situation side, index rose to 112.0 in August 2013, up 1.7% on July 2013 and 0.9% on August 2012. 3mo average through August 2013 stood at 110.5, ahead of 109.1 3mo average through May 2013, but below 112.1 average through August 2012.

Business expectations index also rose in August to 103.3 from 102.4 in July, showing a monthly gain of 0.9% and an annual gain of 9.8%. 3mo average through August 2013 is at 102.7 against 3mo average through May 2013 102.3, suggesting that pick up in overall expectations has been rather subdued. This might be due to the index overall showing lower volatility around the mean than other two indices. In other words, conservative expectations are staying closer to the mean and watching if the rest of the series do catch up with expected expansion. 3mo average through August 2012 was 95.6, suggesting that overall, there has been some serious optimism built up over the last 12 months, further warranting some moderation in the rate of optimism growth forward.

Chart to summarise:

25/7/2013: Ifo Business Climate Survey for Germany: July 2013

Ifo Business Climate Index for industry and trade in Germany is out for July. The index is up at 106.2 from 105.9 in June, marking the third consecutive month of improvements. Current situation index is at 110.1 in July, up from 109.4 in June and also marking third consecutive month of gains. expectations 6 months out remained relatively static at 102.4 against 102.5 in June. Expectations are struggling to gain solid footing, suggesting that businesses are perceiving current conditions (expansion) as being still at risk.

Per Ifo release: "Conditions in the German economy remain fair. The business climate indicator in manufacturing rose slightly. Satisfaction with the current business situation increased for the third month in succession. Business expectations declined minimally, but remain positive. …After last month’s sharp in-crease, export expectations fell somewhat. Firms nevertheless expect expansionary impulses from export business."

24/6/2013: Ifo Business Climate Survey for Germany: June 2013

German economy continues to grow, per latest Ifo Business Climate Survey for June 2013:

Basically, all three core indicators are above the water (>100), with

• Business Climate reading at 105.9, up on 105.7 in May and 105.1 in June 2012. 
• Business Situation reading slipped slightly to 109.4 in June from 110.0 in May and is down on 113.8 recorded in June 2012.
• Business Expectations forward are actually relatively soft at 102.5 in June, up on sluggish 101.6 a month ago and up on contractionary 97.1 in June 2012.
• Dynamics wise, Climate and Expectations readings in June were ahead of their 12mo average through May 2013, but Situation reading is basically flat. On 6mo average through May comparative, all indices are ahead of the average in June, save Climate which is flat.

Of four core subsectors, however, only Manufacturing is above water on expectations side. 

Net: strong performance, given prevailing conditions in the global and euro area economies, but no massive fireworks.

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.

22/6/2012: Don't rush with that 'Germany Imploding' headline, mate

So the silly season of 'Germany is collapsing' is on again today with the release of the Ifo Index and the subsequent media charade on foot of yesterday's PMIs.

Now, let's take a look at the thesis so beloved by on-line business media hacks. Is Germany really caving in?

Headline Business Climate Index from Ifo:

What do the numbers tell us?

• Headline Business Climate index fell from 106.9 in May to 105.3 in June - a monthly drop of 1.5%. Previous monthly drop was steeper at 2.7%, but 'business media' missed that.
• Year on year, the index is down 7.9% - steeper than back in May when it fell 6.4% y/y.
• 3mo MA is down 1.7% on previous 3mo period and is down 5.9% y/y.
• 6mo MA is at 108.3 same as 12mo MA and the last two months both came in at below that. But the 3mo MA is at 107.4 - and that is probably more significant of an indicator than monthly readings. 
• June reading is the lowest since March 2010 - the headline that many captured in their reports.

So things are not great. But are the schloss walls caving in? Look at the historical chart above. Current reading. Current 3mo MA is 107.4 - well ahead of historical average of 100.8 and crisis-period average of 103.2.

Next, take a look at the components of the index:

• Business Situation sub-index actually improved in June to 113.9 from 113.6 in May. So last m/m move was +0.5% against previous m/m move of -3.6%. Y/y comparatives are less pleasant: June 2012 y/y index fell 7.5% against May 2012 y/y fall of 6.7%. 3mo MA fell 1.8% on previous and 5.7% y/y. 
• Overall Business Situation sub-index remain weak - marking second lowest reading since August 2010. And it is below 12mo MA of 117.0 and 6mo MA at 116.0 both in level terms and in 3mo MA terms. Still, the sub-index is well ahead of 101.7 historical average and 107.1 crisis-period average.
• Business Expectations sub-index fell 3.6% m/m in June to 97.3 compounding the fall of 1.8% in May. Y/y sub-index is down 8.3% in June after -6.0% drop in May. 3mo MA is down 1.7% on previous and down 6.2% on same period in 2011.
• At 100.3 3moMA is now below 6moMA at 101.2 but is identical to 12mo MA at 100.3. The 3moMA for the sub-index is basically tracing the historical average of 100.2 and is only slightly ahead of the crisis-period average of 99.7.
• Sub-index is now at the lowest point since October 2011.
• But I wouldn't read too much into expectations sub-index, which tends to reflect the mood of the day, rather than act as a true leading indicator.

So overall, things are weak. The weakness is not accelerating in m/m terms, but is accelerating in y/y terms. Short-term averages are performing in line with June trends. Not a happy place, but not quite Armageddon either.