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Growth on thin ice as German sentiment slides
What does the chart show?
This chart shows quarter-on-quarter German GDP growth alongside the results of the IFO German Business Sentiment survey. The IFO Business Sentiment survey not only provides insight into how German businesses feel about the current economic climate but also their expectations towards the future climate. A score of above 100 suggests that businesses expect an increase in economic activity, while a score under 100 suggests that businesses expect a contraction. Historically, business sentiment surveys such as these have closely aligned with the level of change in economic activity and so are used as leading indicators for where an economy may be headed in the future. However, in Germany a significant disconnect has emerged between business sentiment and economic growth. The results of the latest sentiment survey came in at 84.4, a level not seen since the 2008 financial crisis. Despite this, German GDP growth remained positive last quarter with the economy growing 0.3% in Q3.
Why is this important?
If the historic alignment between sentiment and activity continues, then this dramatic separation can mean one of two things. The first scenario is that German businesses are in a negative sentiment ‘bubble’. Although global economic activity is widely expected to cool and so some negative sentiment is to be expected, the combination of the war in Ukraine, record levels of inflation and slowing economic activity may be combining to give businesses an excessive sense of pessimism. The outlook is undeniably bleak, but all hope is not lost. Although still high, gas prices have fallen significantly from their August peak as storage levels have risen and there are signs that inflation may be easing in other areas. Consumers face a challenging environment but have emerged from the pandemic in a healthier financial state than before. A level of sentiment worse than it was during the pandemic may therefore be unjustified. However, if German business expectations are accurate, which historically they have been, the German economy faces a meltdown of epic proportions. The ECB has failed to act decisively to tackle the record levels of inflation in the Eurozone, and there are few signs of the Ukraine-Russia conflict ending as we head into winter when gas demand is highest. Levels of consumer spending, which recently have largely driven growth in Germany, are likely to tighten as the cost of living rises and German businesses will suffer as a result. Many global economies are asking themselves if a recession will happen at some point. For Germany, a better question may instead be how bad their recession is going to be.
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By Mondial DubaiWhat does the chart show?
This chart shows quarter-on-quarter German GDP growth alongside the results of the IFO German Business Sentiment survey. The IFO Business Sentiment survey not only provides insight into how German businesses feel about the current economic climate but also their expectations towards the future climate. A score of above 100 suggests that businesses expect an increase in economic activity, while a score under 100 suggests that businesses expect a contraction. Historically, business sentiment surveys such as these have closely aligned with the level of change in economic activity and so are used as leading indicators for where an economy may be headed in the future. However, in Germany a significant disconnect has emerged between business sentiment and economic growth. The results of the latest sentiment survey came in at 84.4, a level not seen since the 2008 financial crisis. Despite this, German GDP growth remained positive last quarter with the economy growing 0.3% in Q3.
Why is this important?
If the historic alignment between sentiment and activity continues, then this dramatic separation can mean one of two things. The first scenario is that German businesses are in a negative sentiment ‘bubble’. Although global economic activity is widely expected to cool and so some negative sentiment is to be expected, the combination of the war in Ukraine, record levels of inflation and slowing economic activity may be combining to give businesses an excessive sense of pessimism. The outlook is undeniably bleak, but all hope is not lost. Although still high, gas prices have fallen significantly from their August peak as storage levels have risen and there are signs that inflation may be easing in other areas. Consumers face a challenging environment but have emerged from the pandemic in a healthier financial state than before. A level of sentiment worse than it was during the pandemic may therefore be unjustified. However, if German business expectations are accurate, which historically they have been, the German economy faces a meltdown of epic proportions. The ECB has failed to act decisively to tackle the record levels of inflation in the Eurozone, and there are few signs of the Ukraine-Russia conflict ending as we head into winter when gas demand is highest. Levels of consumer spending, which recently have largely driven growth in Germany, are likely to tighten as the cost of living rises and German businesses will suffer as a result. Many global economies are asking themselves if a recession will happen at some point. For Germany, a better question may instead be how bad their recession is going to be.