UBS Economics-European Economic Comment _German ifo index merely stagnates...-108408916.pdf

ab27May2024GlobalResearchandEvidenceLabEuropeanEconomicCommentGermanifoindexmerelystagnatesinMayifoindexstableinMayafterthreeconsecutiveincreasesTheifobusinessclimateremainedunchangedinMayat89.3,thehighestlevelsinceJune2023,andfollowingthreeconsecutiveincreases.Asinpriormonths,theexpectationscomponentimprovedfurther(+0.7pointsto90.4),buttheassessmentofcurrentconditionsslipped0.6pointsto88.3andstillremainsatadepressedlevel(Figure1).ThestableMayreadingoftheifoindexissomewhatdisappointing,especiallywhencomparedtotheimprovementinlastweek"sCompositePMI(Figure2).However,thisseemstosolelyreflectaweakerassessmentofcurrentconditionsinservices,andtheQ2averageoftheifoindexthroughMayisstillwellaboveQ1(89.3vs86.2).ThisindicatesthatthegrowthmomentumhaslikelycontinuedinQ2afterthesurprise0.2%q/qriseinQ1.Nevertheless,today"sstablereadingshouldcautionagainstexpectationsforatoorapidcyclicalupswing.WeakerservicesoffsetimprovementselsewhereThemainsurpriseinthesectoralbreakdownwastheweaknessinservices,ascompaniesreportedweakercurrentconditions.ThiswasalsothekeydifferencetotheMayflashPMI,withthemoreupbeatservicessentimentinthePMIcontrastingwiththemutedconfidenceintheifoindex.Sentimentintheifosurveywasupinmanufacturing(despitedecliningorderbacklog),trade(mainlydrivenbywholesale)andconstruction(wherecompaniesstillreportlackofneworders).GDPexpectedtogrow0.3%in2024ThesolidincreaseinQ1GDPby0.2%q/qwasapositivesurprise,butthedetailspublishedbydestatislastFridaywerelessencouraging.Inparticular,growthwasdrivensolelybyconstruction(helpedbyfavourableweather)andnetexports,whichbothadded0.3pptoquarterlygrowth.Privateandpublicconsumptionbothdeclined,deducting0.2ppand0.1ppfromgrowth,respectively.Whilehouseholds"realdisposableincomegrew2%y/y-thefastestrateinthreeyears-householdssavedtheadditionalincomeandthehouseholdsavingsrateincreasedtoathree-yearhighof12.4%.Lookingahead,weexpecthouseholdconsumptiontoincrease,notablygoodsconsumptionwhichhassofarlaggedservicesconsumption(Figure10).Theimprovementinmanufacturingsentimentisalsoexpectedtohalttheongoingdeclineinneworders(Figure9).Regardingtheoveralloutlook,theBundesbankarguedcautiouslyoptimisticinitsMaymonthlybulletinthat“theunderlyingcyclicaltrendisprobablygraduallygatheringmomentumslightly”andexpectedGDP“toriseagainslightlyinthesecondquarterof2024”.WeexpectQ2GDPtorise0.2%q/qandprojectannualaverageGDPgrowthof0.3%in2024and0.8%in2025,upfrom0%in2023.GermansentimentverygraduallycatchesuptoFranceandItalyNationalsentimentindicators(i.e.ifo,INSEEandISTAT)continuetopointtoweakergrowthfortheGermaneconomythanforFranceandItaly(Figures12-16),butthegaphasstartedtonarrow,inparticularinmanufacturingandretail.TheFrenchINSEEforMay(releasedon24May)wasstableat99(belowitslong-runaverageof100),withimprovementsinservicesoffsetbyadeclineinmanufacturing.TheItalianISTATforMaywillbepublishedon29May.ThisreporthasbeenpreparedbyUBSEuropeSE.ANALYSTCERTIFICATIONANDREQUIREDDISCLOSURES,includinginformationontheQuantitativeResearchReviewpublishedbyUBS,beginonpage8.Econom