ifo Business Climate Index for Germany

Supply Problems Weigh on ifo Business Climate (October 2021)

Sentiment in the German economy has clouded over. The ifo Business Climate Index fell from 98.9 points  in September to 97.7 points in October. Skepticism is increasingly evident in expectations. Companies’ assessments of their current situation are also less positive. Supply problems are giving businesses headaches. Capacity utilization in manufacturing is falling. Sand in the wheels of the German economy is hampering recovery.


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Infographic, ifo Business Climate Index, October 2021, news picture

In manufacturing, the Business Climate Index fell once again. Companies are somewhat less satisfied with their current business. Expectations are also clouding further. Supply bottlenecks drove capacity utilization down 2.1 percentage points to 84.7 percent.

In the service sector, the business climate worsened again after a recovery in the previous month. Companies are considerably less optimistic about the coming months. However, their assessments of the current business situation are slightly improved.

In trade, the index fell markedly. Businesses are notably less satisfied with their current situation. They are also more pessimistic about the coming months. Here, too, supply bottlenecks are weighing on sentiment.

In construction, the business climate improved further. Companies’ assessments of their current situation are a little better. Moreover, the expectations index rose for a sixth consecutive time.

Clemens Fuest
President ot the ifo Institute

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Supply Problems Weigh on ifo Business Climate (October 2021)

info graphic ifo Business Climate October 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 October 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.

Infographic, ifo Business Cycle Clock Germany, October 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 current situation against expectations – passes through quadrants labeled with the different phases of activity, namely recovery, boom, slowdown, and crisis; provided that the expectations indicator sufficiently precedes the current business situation indicator. If survey participants’ assessments of the current business situation and their business expectations are both below average on balance, economic activity is plotted in the “crisis” quadrant. If the expectations indicator is above average (with an improving but below average business situation on balance), economic activity moves to the “recovery” quadrant. If the business situation and expectations are both above average on balance, economic activity appears in the “boom” quadrant. If, however, the expectations indicator falls below average (with a deteriorating but above average business situation on balance), economic activity slips into the “slowdown” quadrant.

Infographic, ifo Business climate Index October 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.

Infograpic ifo Business Climate index October 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.

Infographic, ifo Business climate Index October 2021, Heatmap of ifo Business Survery

The ifo Heatmap is a compact summary of the ifo Business Cycle Clock for the individual sectors of the German economy. If the ifo Heatmap shows dark blue, then the business situation and expectations are below average and companies are in crisis. As business expectations improve, the light red recovery sets in. If the business situation and expectations are above average, companies are in a dark red boom, which is often referred to as overheating. If the light blue cooling sets in, then business expectations are deteriorating.

ifo Business Climate Germany

(Index, 2015 = 100, seasonally adjusted)

  10/20 11/20 12/20 01/21 02/21 03/21 04/21 05/21 06/21 07/21 08/21 09/21 10/21
Climate 92.2 91.3 92.8 90.8 93.0 96.7 96.5 99.3 102.0 100.8 99.7 98.9 97.7
Situation 90.0 90.4 91.8 89.5 91.1 93.5 94.3 96.0 100.0 100.5 101.5 100.4 100.1
Expectations 94.5 92.3 93.8 92.1 95.0 100.0 98.7 102.8 104.0 101.1 97.8 97.4 95.4

Source: ifo Business Survey.
© ifo Institute

ifo Business Climate Germany and by Sector

(Balances, seasonally adjusted)

  10/20 11/20 12/20 01/21 02/21 03/21 04/21 05/21 06/21 07/21 08/21 09/21 10/21
Germany 1.6 -0.4 2.8 -1.5 3.3 11.3 10.9 17.2 23.0 20.4 17.8 16.1 13.6
Manufacturing 1.0 4.8 10.1 9.9 16.6 23.6 24.9 25.9 29.1 27.6 24.4 20.0 17.2
Service Sector 3.2 -2.5 0.2 -3.7 -1.4 6.8 3.7 13.9 22.8 19.9 17.8 19.1 16.5
Trade -0.4 -3.8 0.6 -16.7 -14.2 -1.2 -0.4 8.6 18.0 15.9 9.0 9.0 3.7
Construction -0.9 -0.9 -0.7 -5.3 -2.7 2.7 1.0 3.3 4.4 6.3 8.1 11.1 12.9

Source: ifo Business Survey.
© ifo Institute

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Contact
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
Mail
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