German Ifo business climate index falls surprisingly in December, economy likely to grow again in Q4

The German Ifo business climate dropped surprisingly sharply in the month of December. The headline index dropped to 101 from prior month’s 102. Consensus expectations were for the index to fall to 101.7. The decline since the start of the year is mainly because of the deceleration in demand from China. Business expectations index dropped to 97.3 from 98.7. The fall in business expectations was slightly more pronounced than in the assessment of the current business situation that dropped to 104.7 from 105.5.

Sentiment dropped in manufacturing as well as in service sectors in December. However, since early 2018, the fall in the business climate has been dominated by export-oriented manufacturing, which is suffering above all from falling demand from China, noted Commerzbank in a research report. But the Chinese leadership is taking countermeasures and stimulating domestic demand with tax cuts and, most recently, additional loans from state-owned bank.

“We expect that this will have the same effect as in the past and that the Chinese economy will stabilize in the first half of next year. Then the decline in the Ifo business climate should also come to an end”, said Commerzbank.

Service sector has been greatly immune to fluctuations in the manufacturing sector since 2012. This speaks in favour of a continuation of the upswing in Germany. This is mainly because of the ECB’s very loose monetary policy, which is stimulating domestic demand in Germany.

Car sales are rebounding from the slump in connection with the new emission tests. Thus, the German economic growth should expand again in the fourth quarter.

“With the expected stabilization of demand from China, the German economy should pick up somewhat more strongly in the spring. The upswing in the economy should continue in 2019 with employment to move up further. For next year as a whole, we expect GDP growth to rise by 1.2 percent”, added Commerzbank.

At 11:00 GMT the FxWirePro's Hourly Strength Index of Euro was highly bullish at 102.837, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -69.0835. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex