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.

30/4/2013: Business Confidence... not exactly an unbiased metric of reality

Readers of this blog would know that I have always been skeptical about 'business confidence' and 'consumer confidence' surveys as indicators of true underlying activity or predictors of the future activity. In the past I have criticised the German Ifo data on business expectations (http://trueeconomics.blogspot.ie/2013/02/22022013-small-cloud-over-german.html) and Irish consumer confidence indicators (http://trueeconomics.blogspot.ie/2013/04/2642013-another-indicator-turns-south.html) as being somewhat systemically biased into the la-la land. I even lost Sunday Tribune column back in 2007 on foot of criticising one of Ireland's largest real estate brokers' research on similar methodological basis.

Now, behold research from NBER, titled "Firms’ Optimism and Pessimism"  
(NBER Working Paper No. w18989) by RUDI BACHMANN, STEFFEN ELSTNER and (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2257179) which looks at whether in general, firms’ expectations can be systematically too optimistic or too pessimistic. The authors used "micro data from the West German manufacturing subset of the IFO Business Climate Survey to infer quarterly production changes at the firm level and combine them with production expectations over a quarterly horizon in the same survey to construct series of quantitative firm-specific expectation errors."

The authors found that "depending on the details of the empirical strategy at least 6 percent and at most 34 percent of firms systematically over- or underpredict their one-quarter-ahead upcoming production. In a simple neoclassical heterogeneous-firm model these expectational biases lead to factor misallocations that cause welfare losses which in the worst case are comparable to conventional estimates of the welfare costs of business cycles fluctuations. In more conservative calibrations the welfare losses are even smaller."

Ouch… the confidence fairy might not only be a lier, but biased lier on top of that…

26/09/2011: French and German indices signal continued slowdown in September

This week's early trickle of data is continuing to signal ongoing process of deteriorating macroeconomic conditions in core euro area economies.

According to the latest reports, Portugal's economy is likely to post 2.3% decline in GDP in 2012 (revised from 1.8% decline forecast earlier) and shrink 1.8% in 2011 - an improved estimate on 2.2% contraction predicted in Q1 2011 (the swing in 2011 is due to strong H1 2011, while the swing in 2012 forecast is due to weak expectations for H2 2011 and after).

France's MNI survey of economic forecasts (here) are coming in weaker by the week. For previous week, median forecasts were for

• Manufacturing PMI at 48.2 down from 49.1 a week before, both below growth line of 50;
• Services PMI at 54.4 down from 56.8, above the growth line, but slowing

Confirming these, Insee Index of Business Climate posted the first below 100 reading since June 2010, coming in at 97 in September, down from 101 in August. 3mo average through September is now at 101 against the previous 3mo period average of 108. Year on year, index is down 5 points. Just as with German data below, the latest result marks the third month of continued declines.


And today, German Ifo index came with further downgrades to business expectations and conditions. Here's the chart:

• Business climate assessment came in at 107.5, above expansion line, but down for the third month in a row. 3mo average through September is now at 109.7 down from previous 3mo average (through June) at 114.3. Year on year the index is down 3.7 points.
• Business situation sub-index came in at 117.9, down from 118.1 in August, marking 3rd month of continued declines. Q2 average is 121.9 and Q3 2011 average is now at 119.1.
• Business expectations sub-index has hit contraction territory at 98.0 against August reading of 100.1. Q2 2011 expectations average was 107.1, while Q3 2011 average is 101.0. Year on year September 2011 reading is down 9.9 points.