Ifo Index: German Business Optimism Fades to Lowest Level Since May 2017

- Ifo Business Sentiment survey falls below expected level in April

- Continues to suggest widespread retrenchment in early 2018 

- Survey falls into line with other sentiment indicators all suggesting Eurozone may have peaked

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© Lisa L, Adobe Stock

German business optimism faded in April amidst ongoing signs that the bumper growth experienced by the German and Eurozone economies in 2017 has passed a peak.

The Ifo business climate survey reported a balance of 102.1 in April, down from 103.3 in March and lower than the expected 102.8, according to data from the Ifo Institute of economic research, released on Tuesday.

The survey measures over 7000 responses from business in all the major sectors of the Germany economy.

The Ifo 'current business assessment' gauge also weakened more than expected, falling to 105.7 in April from 106.6 in March and also below the expected level of 106.0.

The Ifo future 'business expectations' survey, which asks respondents about their views of the economy in 6-months' time reported a balance of 98.7 in April, down from 100.0 in March and also below forecasts of 99.5.

The Ifo is considered a reliable leading indicator for the German economy, and because it is the largest economy in the Eurozone, the area in general. The data corroborates the findings of other surveys which suggest the break-neck pace of growth witnessed in 2017 might have passed, which will in turn likely have consequences for future policy changes at the European Central Bank.

This all ultimately has a bearing on the direction of the Euro which shot higher in 2017 alongside a series of consensus-busting growth reports.

"We think that today’s decline is largely a reflection of somewhat less bullish fundamentals. As we have repeatedly stated previously, the global economy has been losing some momentum in recent weeks, with global trade being less vibrant than at the turn of the year," says Dr. Thomas Strobel, Economist with UniCredit Bank in Frankfurt.

In the March ifo survey sentiment dipped as a result of respondents' fears about the impact of trade protectionism.

"The threat of protectionism is dampening the mood in the German economy," said the Ifo survey's accompanying statement for March.

There was no mention of the impact of trade protectionism fears on survey respondents in April and the accompanying statement appeared to suggest the falling sentiment was indicative of a more fundamental slowdown in the German economy.  

"High spirits among German businesses have evaporated. The ifo Business Climate Index for Germany fell to 102.1 points in April from 103.3 points in March. The indicator for the current business situation fell and expectations also deteriorated. The German economy is slowing down," says Clemens Fuest, president of the Ifo Institute.

The survey data mirrors similar trends in Eurozone survey data elsewhere such as the declines fnoted in the IHS Markit PMI surveys at the start of this year.

"And that continues the disappointing run of Eurozone data," commented Justin Low, an analyst at Liveforex after the release.

The methodology of the Ifo business climate survey was modified in the latest April 2018 survey to now incorporate the services sector as well as the existing manufacturing, construction, wholesaling and retail sectors.

In addition, the aggregation method was modified slightly and the base year for the index calculation shifted from 2005 to 2015.

The IFO is a key monthly survey that measures the business climate in Germany. It is widely followed as an early indicator of the state of the German economy. The survey is based on responses from approximately 7,000 firms in manufacturing, construction, wholesale, retail and now services. As the largest economy in the European Union, Germany's business climate has significant implications for the rest of the European Union.

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