Euroland: Ifo Highlights Recession Risk

Overview: The German ifo fell yet again from 94.8 in August to 92.9 in September (consensus 94.3). This was the fourth month in a row the ifo index disappointed. The ifo expectations index fell to its lowest level since January 1993 and is moving even further into recession territory. The weakness is mirrored in a rapid decline in factory orders which suggests that the decline is not a sentiment effect - but is for real.

Details: The decline in ifo was mainly driven by a fall in the current conditions index which fell from 103.2 to 99.8. The current conditions index tends to lag the other sub-index - the expectations index - and this suggests a further decline in the current conditions index in the coming months. This is likely to drag the overall ifo lower. Expectations fell from an already low level to 86.5 from 87.0. This is one of the best leading indicators for Euroland, typically leading production by three months. The two previous occasions the expectations index reached these low levels, the German economy went into recession (in 1993 and 2002). The decline was broadly based on sectors as declines were evident in manufacturing, wholesale and retail. Construction rebounded slightly.

Outlook and assessment: The data highlights the current difficulties in the German economy which seems to have hit a wall over the summer and is now in freefall. The massive headwinds from a global slowdown, high commodity prices, strong euro and an inventory build-up are weighing heavily on activity. We expect the German economy to continue to struggle over the coming quarters and this will lead to rising unemployment. The weakness is becoming increasingly evident and it is very likely that the ECB will have to revise the GDP growth forecast lower again in December. Pressures are mounting on the ECB and it will have to deliver rate cuts at some point. It will probably drag its feet, though, and we still look for cuts in March and June next year.

Danske Bank
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