German Ifo business climate index remains unchanged in October, GDP growth likely shrank in Q3

German Ifo business climate moved sideways in October. However, in view of the volatility of the data, this is not yet a stabilization and certainly not a trend reversal, said Commerzbank in a research report.

The business climate index came in at 94.6 after rising in the prior month. Consensus expectations were for 94.5. While companies again downgraded their assessment of the current situation, whose index dropped to 97.8, they are somewhat more optimistic for the six months ahead. This ironed out the decline of the expectations index in September.

The trend in the Ifo business climate continues to indicate towards downwards. This is also true for the purchasing managers’ index. Both leading indicators are at similar levels as they were in the winter of 2012/13, when the German economy was in recession.

“In our opinion, the global economy is suffering above all from the bursting of a globalisation bubble: just as companies at the end of the 1990s had exaggerated expectations of the economic potential of the Internet, this time they had too optimistic expectations of a never-ending globalisation”, said Commerzbank.

However, they overlooked the fact that long before Donald Trump’s election resistance to globalization was on the rise in several nations. The financial crisis of 2008/09 shook the sentiment of several people in the market economy and therefore also in free trade. Protectionism is threatening the global value chains that firms have built up over the past decades, although it is unclear which new world trade order will emerge in the end.

“In the third quarter, the German GDP is likely to have shrunk for the second time in a row, which economists call a technical recession. For 2019 as a whole we expect a growth of only 0.4 percent. For the coming year, we forecast a plus of 0.8 percent, which adjusted for the unusually high number of working days is only 0.4 percent”, added Commerzbank.