ifo Business Climate Index for Germany

Coronavirus Wave Weighs on ifo Business Climate (December 2021)

Sentiment at German companies has clouded over for Christmas. The deteriorating pandemic situation is hitting consumer-related service providers and retailers hard. The ifo Business Climate Index fell from 96.6 points  in November to 94.7 points in December. Companies assessed their current business situation as less positive. Pessimism regarding the first half of 2022 also increased. The German economy isn’t getting any presents this year.


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info graphic ifo Business Climate December 2021

In German manufacturing, the index rose again after falling five times in a row. This is due to more optimistic expectations on the part of companies. Order books grew substantially. However, companies’ assessments of the current situation were somewhat worse. Supply bottlenecks for intermediate products and raw materials intensified once more.

In the service sector, the business climate nosedived. The last time the index fell this far was in April 2020. Service providers were considerably less satisfied with their current business. Expectations, having recently been slightly optimistic, also turned pessimistic. Survey responses plummeted, especially in tourism and hospitality.

The index fell sharply in trade as well. Businesses’ assessments of their current situation were markedly less positive. The expectations indicator fell to its lowest level since January. While developments left wholesale relatively unscathed, survey results in retail were as dramatic as they were last winter.

In construction, the business climate worsened. Assessments of the current situation were a little less positive. Moreover, there was a notable increase in pessimism regarding the coming months.

Clemens Fuest
Präsident des ifo Instituts

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Coronavirus Wave Weighs on ifo Business Climate (December 2021)

info graphic ifo Business Climate December 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 December 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 December 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.

 

info graphic ifo Business Climate December 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 December 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.

info graphic ifo Business Climate December 2021

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)

  12/20 01/21 02/21 03/21 04/21 05/21 06/21 07/21 08/21 09/21 10/21 11/21 12/21
Climate 92.7 90.9 93.2 96.8 96.5 99.1 101.7 100.8 99.8 99.0 97.8 96.6 94.7
Situation 91.3 89.6 91.2 93.6 94.4 96.1 100.2 100.5 101.6 100.5 100.2 99.0 96.9
Expectations 94.0 92.3 95.3 100.1 98.7 102.1 103.3 101.1 98.1 97.5 95.5 94.2 92.6

Source: ifo Business Survey.
© ifo Institute

ifo Business Climate Germany and by Sector

(Balances, seasonally adjusted)

  12/20 01/21 02/21 03/21 04/21 05/21 06/21 07/21 08/21 09/21 10/21 11/21 12/21
Germany 2.5 -1.2 3.8 11.6 11.0 16.6 22.4 20.4 18.3 16.5 13.9 11.1 7.0
Manufacturing 9.8 10.1 16.8 23.9 24.9 25.7 28.9 27.8 24.7 20.1 17.5 16.7 17.3
Service Sector -0.1 -3.5 -1.2 6.9 3.9 13.8 22.4 20.0 18.0 19.3 16.7 11.6 4.5
Trade 0.4 -16.6 -14.1 -1.1 -0.3 8.5 17.8 16.0 9.1 9.1 3.7 2.7 -4.1
Construction -0.6 -5.0 -2.7 2.7 1.2 3.4 4.6 6.2 8.1 10.6 13.0 11.7 7.4

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
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