German Ifo business climate index rebounds slightly in September, but economy likely to shrink in Q3

The German Ifo business climate rebounded slightly in the month of September. The Ifo business climate index rose to 94.6 from 94.3 in the prior month. Consensus expectations were for the index to come in at 94.5. Nevertheless, this rebound after the fall in August was only because of companies’ assessment of the current business situation, which rose to 98.5 from 97.4. On the contrary, expectations for the coming six months dropped further to 90.8 in September from August’s 91.3.

However, the mild rebound in the business climate is no reason to sound the all-clear, noted Commerzbank in a research report. Firstly, the decisive expectation component dropped further in the month and is evidently pointing downwards. Secondly, the business climate in the service sector has been falling as sharply as in the manufacturing sector since the spring, even if it rebounded a bit in September. The domestic economy is starting to suffer from the softness of manufacturing. This is consistent with the fact that manufacturing firms are now expecting job cuts.

And thirdly, the purchasing managers’ index for German manufacturing and the services sectors dropped sharply in September and supressed hopes of a stabilization of this leading indicator, said Commerzbank.

“There is now a consensus that the German economy will shrink for the second time in a row in the third quarter, thus fulfilling the definition of a technical recession. This increases the risk of a "real" recession, i.e. a broad-based contraction of the German economy, which will also have a negative impact on the labour market”, stated Commerzbank.