FRANKFURT – German managers were glummer than expected this month as concerns about the health of Europe’s largest economy continued to weigh on the minds of corporate leaders.
The headline business climate index for Germany compiled by the country’s Ifo economics institute fell to 9.17 points this month, which was short of the market estimate of 93.0 and last month’s downwardly revised reading of 93.4, the highest mark of any poll taken since Russia attacked Ukraine in late February of last year.
Both components used to calculate the main reading faltered, with the expectations measure for the coming half year – the main support for the headline rate in recent months – falling for the first time since October. The decline to 88.6 points pushed the expectations gauge below the 91.6 market forecast and the downwardly revised April reading of 91.7. The current conditions component slipped to 94.8, which was a tenth of a point better than the market forecast but below the upwardly revised reading of 95.1 last month.
For the headline reading, the May result “marks the first decline after six increases in a row,” Ifo said. “Driving this development are the significantly more pessimistic expectations.”
Signs point to slowdown
“German companies are sceptical about the upcoming summer,” Ifo said.
Franziska Palmas, an economist at Capital Economics, wrote: “Contradictory messages from the Ifo – which was very weak in May – and the composite PMI mean the performance of the German economy in Q2 is very uncertain. But regardless of how well the economy held up this quarter, we still expect it to be very weak further ahead in 2023.”
Flash May purchasing managers’ indices (PMIs) for Germany released Tuesday showed an unexpected decline in the manufacturing reading as services performed better than expected, raising the composite index to a 13-month high. Weak manufacturing orders were to blame for the drop in the sector’s result, according to pollster S&P Global.
Piled on the growing concerns about demand come fears of more interest rate hikes from the European Central Bank, which has been pumping up borrowing costs every six weeks since policymakers started the current tightening cycle last July.
Palmas wrote that the composite PMI reading had a better relationship with GDP than various Ifo measures in in Q4 and Q1, “so it now seems likely that German GDP will expand in Q2 rather than contracting as we currently forecast. But with the drag from higher interest rates likely to intensify and signs that backlogs of orders are not providing much support to manufacturing activity anymore, we still think that the economy will be very weak in the remainder of 2023.”
EUR/USD rose to 1.079 following the news before slipping back to pre-release levels.
The forward-looking investor expectations component from the monthly poll administered by Germany’s ZEW economic thinktank has been falling since February and hit its lowest level since December this month.
A fortnight ago, German pollster Sentix said its measures of investor confidence for the present and the next six months declined, with the latter falling to its lowest mark since December.
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- Decline follows six months of improvements
- Ifo: managers “significantly more pessimistic”
- Flash PMIs send mix messages
- Drop comes after waning investor confidence
By Eric Culp, European Editor
LiveSquawk News
@EricCulpLS
24 May 2023 | 08:45 GMT
FRANKFURT – German managers were glummer than expected this month as concerns about the health of Europe’s largest economy continued to weigh on the minds of corporate leaders.
The headline business climate index for Germany compiled by the country’s Ifo economics institute fell to 9.17 points this month, which was short of the market estimate of 93.0 and last month’s downwardly revised reading of 93.4, the highest mark of any poll taken since Russia attacked Ukraine in late February of last year.
Both components used to calculate the main reading faltered, with the expectations measure for the coming half year – the main support for the headline rate in recent months – falling for the first time since October. The decline to 88.6 points pushed the expectations gauge below the 91.6 market forecast and the downwardly revised April reading of 91.7. The current conditions component slipped to 94.8, which was a tenth of a point better than the market forecast but below the upwardly revised reading of 95.1 last month.
For the headline reading, the May result “marks the first decline after six increases in a row,” Ifo said. “Driving this development are the significantly more pessimistic expectations.”
Signs point to slowdown
“German companies are sceptical about the upcoming summer,” Ifo said.
Franziska Palmas, an economist at Capital Economics, wrote: “Contradictory messages from the Ifo – which was very weak in May – and the composite PMI mean the performance of the German economy in Q2 is very uncertain. But regardless of how well the economy held up this quarter, we still expect it to be very weak further ahead in 2023.”
Flash May purchasing managers’ indices (PMIs) for Germany released Tuesday showed an unexpected decline in the manufacturing reading as services performed better than expected, raising the composite index to a 13-month high. Weak manufacturing orders were to blame for the drop in the sector’s result, according to pollster S&P Global.
Piled on the growing concerns about demand come fears of more interest rate hikes from the European Central Bank, which has been pumping up borrowing costs every six weeks since policymakers started the current tightening cycle last July.
Palmas wrote that the composite PMI reading had a better relationship with GDP than various Ifo measures in in Q4 and Q1, “so it now seems likely that German GDP will expand in Q2 rather than contracting as we currently forecast. But with the drag from higher interest rates likely to intensify and signs that backlogs of orders are not providing much support to manufacturing activity anymore, we still think that the economy will be very weak in the remainder of 2023.”
EUR/USD rose to 1.079 following the news before slipping back to pre-release levels.
The forward-looking investor expectations component from the monthly poll administered by Germany’s ZEW economic thinktank has been falling since February and hit its lowest level since December this month.
A fortnight ago, German pollster Sentix said its measures of investor confidence for the present and the next six months declined, with the latter falling to its lowest mark since December.