Weakening German business outlook in October marks ‘end of rebound’ - analyst

Author: Tom Brown

2020/10/26

LONDON (ICIS)--A dip in business expectations in Germany during October after five consecutive months of improvement marks the end of Europe’s economic rebound and increases the risk that the region will fall back into recession, according to analysts on Monday.

The Ifo business climate index, derived from a survey of German businesses of future expectations, fell to 92.7 points in October from 93.2 in September despite widespread perception that conditions had improved month on month, indicating growing unease about rising coronavirus infection numbers.

“In view of rising infection numbers, German business is becoming increasingly worried,” said Ifo president Clemens Fuest.

The survey results follow the publication of weakening purchasing managers’ index (PMI) data for the eurozone last week, indicating that the bloc’s private sector economy had slipped back into contraction this month.

As with the PMI figures, the downside risks were stronger for the service sector than for manufacturing, which has proven more resilient so far in the latest phase of the pandemic.

The manufacturing business climate indicator moved back into positive territory for the first time in 16 months as demand conditions improved and capacity utilisation improved from 75.3 to 79.8 points, but optimism about the coming months has evaporated, Ifo said.

The recovery in construction sector market expectations has also stopped improving, with respondent assessments of the current business environment dipping noticeably downward.

The divergence between manufacturing and services is driven by the economic pain from trade restrictions in regions across Europe in a bid to control the spread of the virus without the need to reinstate nationwide lockdown measures, which is hitting services and sparing industry so far, according to ING analyst Carsten Brzewski.

The rebound in manufacturing also lagged behind services in the aftermath of the lockdown period, he added, while the strong rebound in the Chinese economy is helping to sustain European manufacturing despite weakening conditions at home.

The factors buoying manufacturing could see the strong rebound reported by the chemicals sector in the third quarter extend into closing months of the year, but the threat that targeted lockdown measures may not prove effective in controlling the spread of the virus could force force harsher measures.

Policymakers in Italy were reported last week to be considering a return to full lockdown if intensive care bed capacity is threatened by the growth in coronavirus case numbers.

“With even more social distancing restrictions on the horizon, there is a significant risk that ‘smart’ lockdowns across Europe turn into more severe ones, which in turn would bring the third quarter rebound to an abrupt halt in the last few months of the year,” Brzewski said.

“At face value, today’s Ifo index is not weak enough to fear another collapse of the economy but as all of Europe is in the second wave of the virus, today’s Ifo index definitely marks the end of the rebound and the start of double-dip fears."

Front page picture: An intensive care unit at a Rome hospital last week
Source: Riccardo Antimiani/EPA-EFE/Shutterstock