Germany: Decline in Ifo Business Climate sentiment suggests growth is nearing its peak – Capital Economic

February’s fall in Ifo business sentiment suggests that German GDP growth is nearing its peak, but should remain strong, according to Stephen Brown, European Economist at Capital Economics.

Key Quotes

“The fall in the headline Business Climate Indicator (BCI) from 117.6 to 115.4 left it far weaker than the consensus forecast of 117.0 and at a five-month low. While the current conditions component fell, it remained higher than it was in December. The fall in the business expectations component was much larger and left the index at a 10-month low. Weaker expectations could reflect a number of factors, not least the relatively strong euro, signs of slowing demand from China and the drop in German equity prices earlier this month.”

“On the basis of the long-run historical relationship, the Ifo now only points to a slight rise in annual GDP growth from Q4’s 2.9%. And as the indicator has overstated growth in recent quarters and is on track to record its first fall in eight quarters in Q1, it might be more accurate to say that growth is close to its peak. Nevertheless, growth of close to 3% would still be very strong by German standards. And once a government is formed, a small fiscal boost should help to ensure that healthy growth rates are sustained. We therefore maintain our forecasts for above-consensus German GDP growth of 2.7% this year and 2.0% next.”