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Thursday, April 24, 2008

German IFO Business Confidence April 2008

Business confidence in Germany (as measured by the IFO index) fell back in April (reinforcing the impression given by the recent ZEW index reading) as record oil and food prices stoked inflation, weakening further already weak domestic demand, and external conditions - and hence the outlook for exports - continued to deteriorate.

The Munich-based Ifo institute said its business climate index, which is based on a survey of 7,000 executives, fell to 102.4 from 104.8 in March. That's its lowest level since January 2006.

The sub component measuring German executives' assessment of the current business situation declined to 108.4 in April from 111.5 in March, while the indicator measuring expectations for future business dropped to 96.8 from 98.4.

Confidence also fell in France, with sentiment the among the 4,000 manufacturers surveyed by Insee, the Paris-based national statistics office, sliding to a 16-month low of 106 from 108.

In Italy, consumer confidence also held near its lowest level in four years, the Rome-based Isae Institute said today, while in Belgium, business sentiment dropped to the lowest level in more than two years in April.

A sharp slowdown in Europe will damp inflation and force the European Central Bank to cut interest rates within six months, the IMF's European Director, Michael Deppler, said earlier this week.

The ECB is reluctant to follow the U.S. Federal Reserve in cutting borrowing costs to bolster the economy, stressing its concern that inflation may get out of hand.

Food-price inflation in Europe accelerated to 6.2 percent in March from 5.8 percent in the previous month. That's the highest since the European Union's statistics office, Eurostat, began the current data series in 1997. The prices for rice, soybeans, wheat and corn have all risen to records this year. Crude oil also reached a record of $119.90 a barrel on April 22.

At the same time ECB policy makers including Germany's Axel Weber and Juergen Stark have suggested the ECB's current benchmark rate of 4 percent may not be high enough to combat inflation.

PMI Flash Estimates

The April preliminary estimate for the German purchasing managers index for manufacturing came in at 53.6 on Wednesday, significantly below economists' expectations of a 54.8 reading.

On the other hand, the services figure surprised on the upside with a figure of 54.6. The consensus had called for a reading of 51.6.

In March, the manufacturing and service PMIs came in at 51.8 and 55.1 respectively.

The euro zone composite PMI was recorded at 51.9, up from both the previous month’s reading of 51.8 and the expected reading of 51.5, but the eurozone manufacturing sector index, which brings together a number of indicators, dropped sharply, from 52 in March to 50.8.

According to a Danske Bank research note, the most conspicuous part of the euro zone PMI manufacturing results was the fall in the new orders index from 50.9 to 48.6, its lowest level in nearly three years.

Manufacturing new export orders contracted this month for the first time in almost three years, according to purchasing managers’ indices for the 15-country region. Even Germany, where overseas sales have appeared resilient, saw a sharp slowdown in growth rates.

“The effects of the euro are becoming increasingly widespread as long-term supply contracts are renegotiated,” said Chris Williamson at NTC Economics, which releases the figures with the Royal Bank of Scotland. So far, eurozone businesses, especially in Germany, have largely shrugged off the euro’s rise.

The results will worry policymakers because the effects of currency appreciation typically take many months to feed through. This week, the euro rose above $1.60 for the first time since its launch almost 10 years ago – suggesting a further slowdown in exports is in the pipeline.

France’s new export orders were already below 50 in March, but the latest figures for Germany showed a fall from 54 last month to 51.6 in April. The survey in-cludes trade between eurozone countries, but NTC Economics said responses by companies suggested the euro’s value was becoming increasingly an issue.

Germany's economy has performed relatively well in recent months. The economic slowdown is most pronounced in Spain and Italy, with France in between. Germany's overall PMI index rose to 55.0 in April from 53.0 in March. But the French composite PMI dropped to its lowest level since November 2004, dipping to 53.9 in April from 55.9 in March.

With a stubbornly elevated rate of inflation and a weaker rate of growth, the European Central Bank's policy dilemma is worsening, leaving the central bank's rate-setters with little room to maneuver.

The worsening outlook for manufacturing contrasted with bullish euro-zone industrial order inflow reported for February, when bookings rose 0.6% month-on-month and 9.9% year-on-year, according to Eurostat.

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