Germany's IFO business declines in January

The Ifo index declined by more than one point in January, more than expected and on a broad basis. The manufacturing sector suffers from weak demand out of emerging economies. Sentiment in the retail and the construction sector remains strong, despite setbacks. Europe's largest economy remains vulnerable to external shocks. Further declines in coming months would signal a strong downside risks to our 1.8% growth call - and strengthen the ECB's case for more easing.

The drop in expectations by 2.2 points to 102.4 was the sharpest drop since June 2012, accidentally or not one month before Mario Draghi's whatever-it-takes speech. In the second quarter of 2012, German GDP rose by just 0.1% q/q. So today's numbers should be seen as a warning signal.

After the decline in January, the Ifo no longer suggest GDP growth of 2% y/y . More generally, sentiment indicators have recently painted a brighter picture of the economy than hard data. Further declines in this order of magnitude in coming months would signal a strong downside risks to our 1.8% growth call.

One shouldn't forget, that the Ifo is still far above the long-term average, although not that far when it comes to expectations. It is believed, domestic strength will compensate for external weakness only if Emerging Markets do not find themselves in a downward spiral but stabilise during 2016.

"We estimate that GDP increased by 0.3% q/q. Our take for Q1 is 0.4%, again mainly driven by domestic demand, mostly private consumption price and government spending. We will keep a close eye on all indicators to check whether our forecast is too optimistic", says Nordea Bank.