For Germany, The Four Year Business Cycle Is Complete

Next week will see a slew of key data releases across the Euro area. The week will kick off with the German Ifo for August due on Monday which Goldman expects to fall slightly, reflecting the softening in the August composite PMI.  The business climate index has been signalling a further loss of momentum in the German economy, with both key dimensions - the assessment of current conditions and business expectations - deteriorating since May. The chart below shows how both components have evolved during the European debt crisis. The 'expectations' component appears to have been particularly affected by European developments. As far as the sectoral breakdown is concerned, the Ifo was still signalling rather robust domestic growth in construction, and in retail and wholesale goods, while the manufacturing sector seemed to have been adversely impacted by a weakening in external demand. The 'flash' reading of the August manufacturing PMI for Germany, however, seems to indicate that this could be changing. As the chart indicates, between the survey's mediocre perspective of the current situation and its negative expectations for the future - we have completed the circle and stand back at precarious Mid 2008 levels - and we know what came next.

German IFO - charting current situation (y-axis) against futures expectations (x-axis) - shows we have almost completed the circle...


Chart: Goldman Sachs