As the European double, and in some cases triple, dip, continues to take its toll on the periphery (in some cases retroactively, with Spain realizing that 2010 and 2011 GDPs were mysteriously lower than expected, previously printing at -0.1% and 0.7%, revised to -0.3% and 0.4%), the core continues to be dragged ever more into the quicksand of insolvency. The latest confirmation came from Germany, where for the fourth month in a row the IFO survey showed that firms have grown more pessimistic for the 4th month in a row in August, declining from 103.3 to 102.3, on expectations of a 102.7 print, with the Current Assessment dropping from 111.6 to 111.2, while Expectations declining from 95.6 to 94.2. What is disturbing is that this is happening even as the EURUSD continues to be at multi-year lows, which is certainly beneficial to German exporters. The obvious implication is that the higher the EUR rises, the less confident German businesses will be, which also explains why to Germany the best Nash (dis)equilibrium in Europe is to keep the periphery on the edge as long as possible, and the EURUSD as low as possible.
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A summary assessment of the IFO print via SocGen:
The IFO survey confirmed that the euro debt crisis is gradually taking its toll on German firms' expectations. Although the present remains good and points to continuing growth, German firms are clearly growing more pessimistic about the outlook. This is a gentle reminder that the German economy is not immune to a major downturn in its partners' economic background
Overall, the business climate fell to 102.3 from 103.2. At this level, the business climate remains above its long-run average (by 0.2 standard deviations). More worryingly, expectations deteriorated markedly to 94.2 after 95.5 - the worst figure since June 2009- and stand now 1.0 standard deviation below average.
However, the IFO survey should go some way towards tempering expectations of a sharp economic downturn in Germany. Current conditions decreased slightly in August (111.2 after 111.5) and remain 0.9 standard deviation above historical average. Once again, the IFO business climate index tells a totally different message from the PMIs, which were respectively 1.2 and 1.1 standard deviations below its long-run average in August for the manufacturing and the services sectors. This is an exceptional divergence between the two surveys. In our views, the IFO current conditions component still points to upside risks to our Q2 GDP forecast (0.1% qoq, after 0.3% in Q1).
Across sectors, changes in the business climate were quite diverse: echoing the PMI surveys last week, manufacturing sentiment improved somewhat (by 0.8 pt). Other sectors carried on falling. Interestingly, business confidence now stands close to its long-run average in all sectors. In a nutshell, the more domestically-oriented sectors are losing steam which will raise concerns about the resiliency of the German economy.
And from Goldman:
Overall, German companies are worried about the medium-term outlook. These concerns are presumably related to the Euro crisis and the possibility of a deterioration in the tensions in financial markets and the periphery. The actions of policy makers in the coming weeks will determine whether or not these concerns increase further - with an increasing risk that these negative expectations become self-fulfilling.