German Ifo Business Climate Index Slides to 87.3 on Recession Threat

Highlights

• The German economy was in the spotlight again this morning, with business sentiment drawing interest.
• In July, the Ifo Business Climate Index fell from 88.6 to 87.3.
• However, US consumer confidence numbers will likely have more influence this afternoon.

It was a relatively quiet start to the European session. After dismal private sector PMI numbers for July, the German economy was in the spotlight again. The German Ifo Business Climate Index and sub-components drew interest this morning.

The German Ifo Business Climate Index fell from 88.6 to 87.3 in July. Economists forecast a decline to 88.0. In July, the business expectations sub-Index fell from 83.8 to 83.5, with the current assessment sub-Index falling from 93.7 to 91.3.

According to the July survey,

• The headline Index fell for the third consecutive month, with business sentiment towards current conditions a drag.
• In manufacturing, firms had a worse view of the current situation while also becoming more pessimistic.
• The services sector followed a similar trend vis-à-vis the current assessment, with firms less satisfied with their current business situation. However, firms were less pessimistic about their near-term expectations.

The Ifo survey aligned with the German private sector PMI survey, which revealed a negative outlook on activity for the first time since December. Significantly, the PMI numbers and the Ifo figures could give the ECB doves more voice this week.

While the markets have cemented a 25-basis point interest rate hike on Thursday, deteriorating macroeconomic conditions could allow the ECB to hit the brakes on the monetary policy tightening cycle, with a euro area recession now likely.

Business confidence is a leading indicator, with weakening sentiment signaling a deteriorating macroeconomic environment. Weaker sentiment would signal a likely pullback in spending and hiring. Worsening labor market conditions would impact consumer confidence and spending.

EUR/USD Reaction to the German Ifo Business Climate Index

Before the Ifo Report, the EUR/USD fell to a pre-stat low of $1.10598 before rising to a high of $1.10870.

However, in response to the German Ifo Business Climate Index numbers,

the EUR/USD fell from $1.10712 to a post-stat low of $1.10528 before finding support.

This morning, the EUR/USD was up 0.01% to $1.10664.

The numbers were also bearish for the DAX, which also responded to the bearish German private sector PMI numbers on Monday. This morning, the DAX was up 0.12% to 16,209.

Up Next

No ECB members are on the calendar to speak today, leaving commentary with the media and US economic indicators to move the dial.

US consumer confidence numbers for July will move the dial this afternoon. Economists forecast the CB Consumer Confidence Index to rise from 109.7 to 111.5.

An upward trend in the US CB Consumer Confidence Index would signal a pickup in consumption that would fuel demand-driven inflationary pressure. The numbers could influence the Fed, with consumers likely responding to bets on the Fed hitting the proverbial brakes.