ifo Business Climate Index for Germany

ifo Business Climate Index Falls (January 2021)

Sentiment among German managers has deteriorated. The ifo Business Climate Index fell from 92.2 points (seasonally adjusted) in December to 90.1 points in January. Companies assessed their current situation as worse than last month. Their expectations were also more pessimistic. The second wave of coronavirus has brought the recovery of the German economy to a halt for now.


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Info graphic, ifo business climate index, news picture, January 2021

After eight consecutive rises, the index fell this month in manufacturing. This was due to notably less optimistic expectations among manufacturing companies. In contrast, assessments of the current situation were considerably better. Capacity utilization rose by 1.6 percentage points to 81.8 percent, but is still lower than its long-term average of 83.5 percent.

In the service sector, the business climate indicator was significantly lower. Companies adjusted their assessments of the current situation downward. They were also much more pessimistic about the coming months. Order book development was weaker, especially in transport and logistics.

In trade, the Business Climate Index nosedived. The indicator for the current situation plummeted into negative territory. This was its steepest drop since April 2020. Expectations were also sharply more pessimistic. Sentiment worsened across almost all retail segments, in some cases drastically. This month, in contrast to December, many indicators in wholesale also pointed downward. 

The business climate worsened in construction, too. Assessments of the current business situation were somewhat less positive. In addition, more companies were pessimistic about the coming months.

Clemens Fuest
President of the ifo Institute

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ifo Business Climate Index Falls (January 2021)

info graphic ifo Business Climate January 2021

The ifo Business Climate is based on approx. 9,000 monthly responses from businesses in manufacturing, the service sector, trade, and construction. Companies are asked to give their assessments of the current business situation and their expectations for the next six months. They can describe their situation as “good,” “satisfactory,” or “poor” and their business expectations for the next six months as “more favorable,” “unchanged,” or "less favorable.” The balance value of the current business situation is the difference in the percentage shares of the responses “good” and “poor”; the balance value of expectations is the difference in the percentage shares of the responses “more favorable” and “less favorable.” The business climate is a transformed mean of the balances of the business situation and the expectations. To calculate the index values, the transformed balances are all normalized to the average for the year 2015.

info graphic ifo Business Climate January 2021

The ifo Business Climate is based on approx. 9,000 monthly responses from businesses in manufacturing, the service sector, trade, and construction. Companies are asked to give their assessments of the current business situation and their expectations for the next six months. They can describe their situation as “good,” “satisfactory,” or “poor” and their business expectations for the next six months as “more favorable,” “unchanged,” or "less favorable.” The balance value of the current business situation is the difference in the percentage shares of the responses “good” and “poor”; the balance value of expectations is the difference in the percentage shares of the responses “more favorable” and “less favorable.” The business climate is a transformed mean of the balances of the business situation and the expectations. To calculate the index values, the transformed balances are all normalized to the average for the year 2015.

info graphic ifo Business Climate January 2021

The  ifo Business Cycle Clock shows the cyclical relationship between the current business situation and business expectations in a four-quadrant diagram. In this diagram, economic activity – shown on a graph plotting the economic situation against expectations – passes through quadrants labeled with the different phases of activity, namely upturn, boom, downturn, and recession; provided that the expectation indicator sufficiently precedes the current business situation indicator. If survey participants’ assessments of both the current business situation and business expectations are negative on balance, the economic situation indicator is in the “recession” quadrant. If the expectations indicator is positive (with a poor but improving business situation on balance), economic activity is shown in the “upturn” quadrant. If the business situation and business expectations are both positive on balance, economic activity is shown in the “boom” quadrant. If, however, the expectations indicator turns negative (with a good but deteriorating business situation on balance), economic activity slips into the “downturn” quadrant.

info graphic ifo Business Climate January 2021

The ifo Business Uncertainty measures how difficult it is for managers to predict the development of their company’s business situation over the next six months. The measure is calculated based on the weighted fractions of companies that fall into the answer options “easy,” “fairly easy,” “fairly difficult,” and “difficult” of a corresponding question in the ifo Business Survey. To this end, the answer categories are mapped onto a numerical scale with equally spaced intervals. Theoretically, the ifo Business Uncertainty can range from 0 to 100. Higher values indicate higher uncertainty: the future business situation is more difficult to predict.

info graphic ifo Business Climate January 2021

Monthly  movements in the ifo Business Climate Index Germany can be translated into probabilities for the two cyclical regimes expansion and contraction using a Markov switching model. The ifo Business Cycle Traffic Lights show the monthly regime probabilities for the expansion phase. Probabilities exceeding the 66% mark signal an economic expansion (green lights); probabilities under the 33% mark signal a contraction (red lights); probabilities in the range in between those two marks signal indifference (yellow lights). This indifference can be interpreted as a buffer zone between the regimes expansion and contraction, in which particularly great uncertainty exists about the state of the economy.

ifo Business Climate Germany

(Index, 2015 = 100, seasonally adjusted)

  01/20 02/20 03/20 04/20 05/20 06/20 07/20 08/20 09/20 10/20 11/20 12/20 01/21
Climate 95.2 95.8 86.7 75.5 80.5 86.1 90.0 92.3 93.3 92.6 90.9 92.2 90.1
Situation 99.1 98.8 92.9 79.4 79.0 81.4 84.6 87.9 89.2 90.4 90.0 91.3 89.2
Expectations 91.6 92.9 81.0 71.8 82.0 91.1 95.8 96.9 97.5 94.9 91.9 93.0 91.1

Source: ifo Business Survey.
© ifo Institute

ifo Business Climate Germany and by Sector

(Balances, seasonally adjusted)

  01/20 02/20 03/20 04/20 05/20 06/20 07/20 08/20 09/20 10/20 11/20 12/20 01/21
Germany 8.2 9.5 -10.4 -35.0 -24.1 -11.7 -3.3 1.7 3.9 2.4 -1.2 1.4 -3.0
Manufacturing -3.1 -2.1 -16.9 -41.8 -34.6 -23.5 -13.3 -5.9 -0.4 1.3 4.0 9.1 8.8
Service Sector 18.4 16.9 -6.8 -32.6 -20.3 -6.0 1.6 7.6 6.9 3.9 -3.0 -0.4 -4.4
Trade 2.1 0.7 -20.6 -47.7 -30.1 -14.2 -5.3 -4.9 0.3 -0.1 -4.0 0.3 -17.2
Construction 13.4 13.3 4.9 -17.0 -11.5 -6.5 -2.2 -0.1 3.1 0.0 -0.7 -0.8 -5.1

Source: ifo Business Survey.
© ifo Institute

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Dr. Klaus Wohlrabe

Dr. Klaus Wohlrabe

Deputy Director of the ifo Center for Macroeconomics and Surveys and Head of Surveys
Tel
+49(0)89/9224-1229
Fax
+49(0)89/9224-1463
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