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Strong Bounce in the IFO Business Climate

June 24, 2020 By Mircea Vasiu

The IFO survey in Germany is one of the closest watched as it shows the state of the largest economy in the Eurozone. It often indicates what the economic evolution for the entire Eurozone is, with immediate effects on the common currency, the Euro. 

Today, the IFO showed that the business climate index rose sharply. More precisely, the index recorded its strongest increase ever, spurring hopes that the worst of the pandemic is behind us.

Details of the June 2020 IFO Survey

The IFO is a composite index constructed based on surveyed business managers active in areas like manufacturing, construction, services, but also in areas like retailing and wholesaling – note the difference with the PMI release, which mainly focuses on manufacturing and services in general.

Businesses in the construction sector registered less pessimistic expectations, lifting the business climate. Assessment of the current situation also improved in the services sector while the manufacturing business climate index rose significantly in June. In the trade area, the mood in retail is less pessimistic than in wholesale, but overall improvements are notable here too.

The IFO business climate index reached 86.2 points in June, advancing sharply from the 79.7 May data. The rise is important because of the large sample size that takes part in the survey. Around nine thousand businesses across Germany ask respondents to rate the business conditions and expectations for the period ahead – six months.

The release is a leading indicator of economic health in the Eurozone’s largest economy, and it has a strong market impact. This is particularly important in the current pandemic times when uncertainty about the future affects businesses and consumers alike.

Business managers are inquired to describe their current business situation and choose one of the three options available – good, satisfactory, and poor.

For future expectations, they have to choose one of the three options on the table – more favorable, unchanged, less favorable. The result compiles the answers and averages them with the average 2015 base that the IFO considers.

The current release provides a more optimistic view of the German business climate. Coupled with the sharp rebound in the Eurozone PMIs from yesterday, it suggests strong GDP growth to follow in the period ahead.

However, investors should be aware that due to the recent lockdowns, both IFO and PMI surveys are likely to have broken down the correlation with the GDP for the moment. Nevertheless, the strong gains are encouraging.

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