The Ifo business climate index fell slightly in Germany in October, with the index dropping to 108.2 from 108.5 in September. This is the first fall in three months but forecasts were for an even bigger fall to 107.8 as German industry adjusts to weaker global demand.
The impact of the slowdown in global growth was evident in the IFO current assessment index, which fell by a bigger-than-expected amount to 112.6 in October from 114.0. Forecasts were for a reading of 113.5. The business climate for manufacturers fell for the third month in-a-row but the Volkswagen scandal did not appear to damage confidence in the German auto sector, which reported improved optimism during the month. Business climate in the construction sector was also higher but it was unchanged in wholesaling sector, while it declined in the retailing sector.
In a sign that the current slowdown is likely to have only a limited impact on German growth, future expectations rose to the highest level since March. The Ifo expectations index climbed to 103.8 in October from 103.3 previously and above estimates of 102.3. This suggests that the German economy is unlikely to fall into recession even if exports suffer a drop in sales as consumer spending and business outlook continue to hold up.
On Friday, the Markit PMI flash readings painted a similar picture. Flash manufacturing PMI for October was lower at 51.6 from 52.3 previously on weakening new orders. But the flash services PMI jumped to a 7-month high of 55.2 from 54.1 in August on rising business activity.
The improved outlook for the future may be in part contributed to the European Central Bank’s current bias for further easing of monetary policy. Last Thursday, the ECB strongly hinted that the Governing Council could decide as early as December to adjust policy to be more accommodative as inflation diverts further away from the ECB’s target. An escalation of the Volkswagen emissions scandal to other manufacturers could yet prove damaging to Germany’s auto industry but for now, investors are more focused on the ECB’s firepower.
The euro held steady against major currencies after the data following last Friday’s sharp losses. The single currency was trading at 1.1038 dollars in mid-European trading, coming off earlier lows of 1.0998 dollars. Against the yen and the pound, it was trading at 133.61 yen and 0.7197 pounds.