The Ifo survey gives a similar message to the PMI: the German economy is collapsing, with services bearing the brunt. And the situation is likely to get worse in April.
Services sector grinding to a halt
- The Ifo survey gives a similar message to the PMI: the German economy is collapsing, with services bearing the brunt. And the situation is likely to get worse in April.
- It’s no great surprise that March’s Ifo Business Climate Indicator (BCI) was revised down, from the flash estimate of 87.7 to 86.1, given that the economic situation has worsened over the past week. (See Chart 1.) The expectations component is consistent with a sudden drop in GDP comparable to that seen at the trough during the global financial crisis. (See Chart 2.)
- The revisions mean that the Ifo and PMI now give a consistent picture of how the crisis has affected different sectors. The flash Ifo release showed similar sized falls in the services and manufacturing indices. But following the German government’s decision this weekend to close restaurants and cafes, and impose other social distancing measures, the Ifo now shows much bigger declines in services and wholesale and retail trade. Given that these measures have only been in place for a few days, it’s striking that the services index is consistent with activity falling by about 3% y/y. (See Chart 3.)
- Manufacturing has taken a big hit too though, with weak demand and supply chain problems having disrupted production for several weeks. Manufacturers’ expectations have plummeted and point to industrial production falling off a cliff in the coming months. (See Chart 4.)
- All of this is consistent with our view that German GDP will contract in Q1 and, if strict government controls remain in place or escalate further, collapse in Q2. Declines of between 10% and 20% look probable, eclipsing anything seen during the global financial crisis.
Chart 1: German Ifo Current Situation
Chart 2: German Ifo Business Expectations & GDP
Chart 3: German Ifo Services Index & Services GVA
Chart 4: German Ifo Manufacturing Expectations
Jack Allen-Reynolds, Senior Europe Economist, firstname.lastname@example.org