ab23 February 2024Global Research and Evidence LabEuropean Economic CommentGerman ifo index: A bit better as expectations improveifo index up in February, in contrast to the PMI...The headline ifo index improved slightly in February, rising 0.3 points to 85.5 (in line with consensus), but still remaining at levels seen in the autumn of 2022 at the height of the energy crisis. While the current conditions component was stable at 86.9 (levels close to July/August 2020), the business expectations component rose 0.6 points to 84.1, a two-month high (Figure 1). The overall message from the ifo index is hence a bit more upbeat than the decline in the Composite PMI released yesterday, even though it merely reverses some of the gap that had opened up between both surveys in recent months (Figure 2). Both remain at very weak levels: despite the slight increase in February, the average ifo index in Q1 (85.4) is still well below Q4 (86.8). ...but the sectoral breakdown was very similar to the PMIDespite the differences in the headline indices, the sectoral details in the ifo index were very similar to those in the PMI: sentiment in manufacturing (and trade) fell in February (reversing the gain in January), but services was up (Figures 3 and 4). Manufacturing firms reported a further decline in the order backlog and expect further production cuts. The separately reported construction sector improved slightly (though still remains at levels last seen in 2005), perhaps reflecting the latest pick-up in housing construction permits (Figure 7). Q4 GDP decline was driven by investment, consumption was upThe federal statistical office today confirmed that GDP fell 0.3% q/q in Q4, driven by particularly weak gross fixed investment (-1.9% q/q), notably in machinery, equipment and motor vehicles, and a negative inventory contribution. By contrast, private consumption rose 0.2% q/q, reflecting stronger services consumption, and public consumption increased as well. The household savings rate remained stable at 11.4%, implying that stronger consumption reflected increased disposable income. Both imports and exports declined, with a flat contribution of net exports. Employment reached a historical high in Q4, driven by increased job gains in the services sector, notably public administration. Hourly labour productivity declined 0.4% q/q. GDP expected to grow 0.3% in 2024, but with downside risksLooking ahead, the German economy continues to face multiple headwinds, ranging from declining order books and weak new orders, tight monetary policy weighing not least on construction and tighter fiscal policy. Higher real wage growth on private consumption amid a still fairly resilient labour market is expected to support consumption, as it has in Q4. We had reduced our 2024 GDP projection by 20bp to 0.3% (after -0.1% in 2023), reflecting the budget cuts announced...
