Defying more optimistic expectations, the downward trend in the German IFO business climate remains unbroken. The index fell to 100.0 in October from 101.4 in September, while we and the consensus expected a slight improvement to 101.6 in October. Still, business expectations at least held steady at 93.2 while a steep decline in the assessment of the current situation to 107.3 from 110.3 drove the overall index lower.
Firms recorded the sharpest fall in business confidence in the retail and wholesale sectors, followed closely by the manufacturing sector. Even in the construction sector, a bright spot over the past few years, confidence fell further.
The IFO business climate in the service sector also fell markedly from 14.1 in September to 9.1 in October and far below its peak in May (24.8). This is based on key segments of the tertiary sector, especially business-oriented segments (excluding distribution, financial services, leasing, insurance and government), which is reported separately and not included in the overall IFO business climate index.
We broadly expected stagnating economic activity in the second half of 2012. Today’s IFO release, especially the weak assessment of the current situation in October and the broad-based decline across service sectors, however, puts downside risk on our Q4 GDP growth forecast (flat, 0.0% q/q). It appears increasingly questionable if domestic demand, primarily household consumption, residential investment and steady public demand, will continue to support the economy sufficiently to offset depressed external demand from most other parts of Europe and waning overseas demand.
Barclays Capital