German manufacturing lifts sentiment in February as export activity booms - Ifo

Author: Jonathan Lopez

2021/02/23

LONDON (ICIS)--German business sentiment surprised on the upside in February as the country’s export-oriented manufacturing sector continued to find markets abroad, the Ifo research institute said on Monday.

An extension of lockdowns until early March and a global shortage of semiconductor chips has hit the automotive sector, prompting expectations that the German economy would be more downbeat in Ifo's widely-followed business climate index.

On a scale to 100, rebased from 2017, indicators for the four major economic subgroups improved in February. Manufacturing boomed (see bottom graph) and construction improved – two key end consumers of petrochemicals.

The overall business climate index for February came in at 92.4 points, up from January’s 90.3 points.

The current assessment of business conditions rose 1.4 points, while expectations jumped to 94.2 points, up from January’s 91.5.

“In manufacturing, the index jumped to its highest value since November 2018... The business climate improved in construction, too. This was due to less pessimistic expectations,” said Ifo President Clemens Fuest.

“However, construction companies assessed their current situation as somewhat worse, above all because of unusually cold weather.”

LOCKDOWN-PROOF MANUFACTURING
According to Ifo, the two other subgroups – services and trade – continued to fare badly because of the customer-facing nature of their business.

Europe has been dealing with the coronavirus pandemic for almost a year, and in that time the industrial sector, where social contact is less important, has returned back to normal operating rates faster than the services sector which is still in the middle of the storm.

While stronger manufacturing was seen after the first lockdowns in Q2 2020, the figures from Ifo on Monday surprised financial analysts because of their “strong dynamics”.

Germany, one of the world's top exporters, boomed during February as the recovery in Asia gathered pace.

The market consensus was for an only slightly stronger expectations component compared with January (91.7 after 91.1), and for the current assessment to remain weak. In January, both components fell by about two points,” said analysts at major German lender Deutsche Bank on Monday.

“The sectorial split mirrored the results from Friday’s PMI, hence confirmed the strong dynamics in the manufacturing sector, were the business climate (balance) jumped from 9.1 to 16.1.”

February's flash PMI indices for services and manufacturing put Germany ahead of its European peers.

The German chemicals industry (which includes pharmaceutical products) is the largest in Europe with sales of €186bn in 2020, according to trade group VCI, and directly employs around 464,000 workers.

NEGATIVE Q1, DESPITE ALL
Although Germany's strict lockdown is set to take its toll on economic growth during Q1, it is likely to avoid a recession - two quarters of negative growth - after a strong rebound in Q2.

The lockdown in place in December came to the rescue of Germany’s health services as there was a sharp rise in hospitalisations from November onward.

The downturn in economic sectors which have remained shut is likely to dent Q1 GDP by 2% quarter on quarter, according to Deutsche Bank.

Analysts at Oxford Economics are slightly more upbeat. They expect a contraction of 0.5% in Q1, although they suggest the figure could change as more data is made available.

“While today’s [Monday] increase in the Ifo is definitely positive news and was in line with Friday’s PMI publication, we continue to maintain our view of a slight contraction of German GDP in Q1,” said Oxford Economics.

“We wait for the release of more informative hard data for the first months of 2021 before reviewing our outlook.”

Ifo is a private research centre whose analysis and indices are widely followed globally giving a sense of the private sector in Germany.

It shares that task with ZEW, another research institute whose indicators are a must-read for German economists.

On 16 February, ZEW said German corporations were becoming more optimistic about expectations for the coming months although the lockdown was weighing on the current assessment, it added.