The German IFO survey is one of the most studied, since it shows the status of the largest economy in the eurozone. It frequently indicates the economic evolution of the entire euro area and, in addition, it generates immediate effects on the common currency: the euro.
This week, the IFO survey has shown that business confidence levels have risen sharply. To be more precise, the index has registered its largest known increase, which has triggered optimistic sentiment and the belief that the worst of the pandemic is behind us.
The June 2020 IFO survey in detail
The IFO is a composite index that is based on the responses of entrepreneurs in relation to manufacturing, construction, services and some areas of retail and wholesale industries (unlike the PMI, which focuses mainly on the manufacturing sector and services in general).
Companies in the construction sector have registered less pessimistic expectations, which has raised general sentiment. The assessment of the current situation has also improved in the services sector, while the manufacturing industry confidence index has increased substantially this June. Regarding retail and wholesale trade, the former is less pessimistic than the latter, but in general terms both improve.
The business confidence index shown by the IFO has reached 86.2 points this June, which is a great advance compared to 79.7 points in May. The increase is considerable if we take into account the wide spectrum of the sample that participates in the survey. There are around 9000 companies from all over Germany, who qualify the business conditions and the hopes regarding what lies ahead (six months ahead).
The publication is a leading indicator in terms of economic health and in relation to the largest economy in the eurozone, therefore, it has a strong impact on the market. In a time of pandemic, it is crucial, since the uncertainty about the future affects both companies and consumers.
Entrepreneurs and managers must describe their current business situation. To do this, they have to choose between three main options: good, satisfactory and bad.
For future expectations, they must also choose between three options: favorable, neutral and unfavorable. The result compiles the responses and averages them based on the 2015 average proposed by the IFO.
The current publication provides a more optimistic view of the German business scenario. Coupled with the strong rebound in eurozone PMIs yesterday, it is a strong sign of potential GDP growth for the foreseeable future.
Despite this, investors should keep in mind that due to recent closings, the IFO and PMI surveys appear to have temporarily broken the relationship with GDP. However, everything that grows is encouraging.