German Ifo Expectations Continue Higher

• The German Ifo rose again in May to 84.2 from 83.7 in April. This was slightly lower than consensus at 85. The most forward looking sub-index “expectations” rose stronger than expected though, and points to continued improvement ahead. The “current conditions” index fell back slightly to 82.5 in May from 83.5, but this index tends to lag and thus says more about the past than about the future.
• The Ifo number broadly confirms the picture of improvement in business confidence and that the worse is behind us in terms of very negative growth rates. The number still points to a decline in production, however.
• We look for a further increase in Ifo in coming months as very lean inventories and rising export demand are expected to lead to rising production in Germany during Q3 and Q4.

Details

Looking at sub-sectors for the overall Ifo the improvement was driven by a rise in the retail sector (net balance rose to -21.2 from -26.5) and wholesale sector (to -28.3 from -30.6). Manufacturing was unchanged while construction fell back slightly (to -26.3 from -24.3). Looking at the expectations index, however, all sectors except construction saw improvement and especially manufacturing is rebounding.

Assessment & Outlook

The rise in Ifo is broadly in line with our expectations of a gradual easing of the downturn and we expect to see further increases in Ifo over the coming quarters. We expect production to start rising soon due to a combination of very lean inventories and a gradual improvement in demand on export markets in Asia (20% of total exports) and US (12% of total exports). The better export situation and easing credit conditions will also put a stop to the steep decline in investments. Consumption growth will likely still be slow, though, and keep the recovery muted.

As the economy shows further signs of recovering we believe this will add to the upward pressure on bond yields over the coming quarters, which is also coming from the massive supply and rising downgrade fears.

Danske Bank
http://www.danskebank.com/danskeresearch

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