And he did it again – IFO business climate index on the rise


Against worldwide rather pessimistic expectations, the German IFO business climate index rose from  a stagnating 106.7 points in April to 107.7 points in May. As the IFO institute explained:

The companies are significantly more satisfied with their current business situation. In addition, they are noticeably more optimistic with regard to the coming months. The German economy is growing at a robust pace.

Other economic figures improved as well: according to the Federal Labour Office, the unadjusted unemployment rate in Germany declined from 6.3% in April to a record low of 6% in May 2016. Given that German GDP also grew by 0.7% in the first quarter of 2016, the German economy is doing quite well for the time being.

However, as stated before, these glossy figures might be deceiving: the world economy is still on the decline and according to a recently released McKinsey report, the worldwide share of managers expecting „a disruption in the global economy due to volatility“ is on record-levels. Also, the OECD has cut its already gloomy growth-forecast for the world-economy to 3.0% (down from 3.3%).  Given also other gloomy forecasts stated elsewhere, it seems obvious that the German optimism is rather based on current national figures rather than an overview of the global economy. Also, at least part of the German „success-story“ has to be attributed to (besides low interest-rates) a boom triggered by the refugee-crisis, hence it is based more on consumption than on actual investments into the future. Since Germany’s economy is still largely based on exports, the impact of a slowing worldwide economy will thus sooner or later also hit home in Germany.

The short-sightedness of Germany’s glossy outlook may also be proved when looking into the corresponding IFO-figures in the run-up to the last global meltdown: the IFO-business climate index rose to its peak in December 2006 with 113.5 points.  However, the index went below 100 points (=contraction) only in August 2008, hence after Bear Stearns faltered and just weeks before Lehman collapsed. This should be telling about the ability of German managers to foresee economic developments in the near future.

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