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Chart of the Day: German IFO business expectations vs German GDP

We saw terrible EU manufacturing data in European trade, notably from Germany, where manufacturing PMI printed 41.4 (a 123-month low), moving ever deeper in contractionary territory.

Green: IFO business expectations. White: German GDP.
Green: IFO business expectations. White: German GDP.
"Source: Bloomberg"

Importantly, we see a negative turn in German service data, and that’s a concern. Those calling for a recession in Germany are certainly getting ever greater ammunition, and that makes tonight’s (18:00 AEST) IFO survey ever more important.

As we can see, the IFO business “expectations” survey has been a good precursor of German economic output for some time. Right now that message is quite dire. There have been calls that the €54bn fiscal package announced on Friday would support growth, and that could be the case. However, when we consider it’s being financed from taxes placed on carbon dioxide, then we see this as fiscally neutral.

For those who hold EUR exposures, the IFO survey is an event risk, although we’d need to see a strong miss to the consensus calls to promote a reaction. One has to consider how bad things get before we see a fiscal response that actually weighs on the current account.

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