Germany: Drop in IFO index - ING

Carsten Brzeski, chief economist at ING, points out that the German Ifo index suggests the risk of a negative sentiment loop is larger than ever for the economy.

Key Quotes

“In July, the Ifo index dropped for the tenth time in the last eleven months since August last year. At 95.7, from 97.4 in June, the Ifo index stands at its lowest level since late-2012. Both the current assessment and expectation components dropped significantly.”

“The German economy increasingly looks like a racing cyclist who has been on solo breakaways from the Eurozone peloton for a long while but is now running out of energy.”

“The industry has been in a constant downswing since last summer. First the slowdown was mainly the result of one-off factors but by now has become rather structural. Even worse, there are tentative signs that the industrial downswing has started to leave some marks on the domestic economy, which up to now had been very resistant to external weaknesses.”

“Order books have shrunk to levels at which companies are reducing production capacities, as illustrated by the increase in (partly subsidised) shorter working hours scheme but also by companies’ profit warnings and announcements of lay-offs.”

“All in all, the German economy is currently at a dangerous crossroads. The powerful recession insurance, domestic demand, is crumbling. Against the background of constantly weakening sentiment, it is doubtful whether domestic demand could rebound without external support, i.e. fiscal stimulus or trade relief.”

“Getting back to that racing cyclist, the German economy needs to watch out that it does not suffer from a typical bonk, collapsing in a leading position and then finishing the race at the end of the peloton. Every cyclist knows that constant – legal – stimulus is the best prevention against a bonk.”