Germany: IFO index drops but remains at high level

The Ifo business climate index in Germany's industry and trade sector fell sharply to 115.4 points in February (from 117.6 in January), however, this is still a very high level. Noteworthy, companies' business expectations have weakened for the third consecutive month. In economic terms, the trees do not grow into the sky. We interpret this development rather as a normalization that was already overdue in view of increasing euphoria than as the beginning of an economic downturn. Several factors may have contributed to the more restrained expectations. Inflation and interest rate fears, which have caused unrest on the financial markets in recent weeks, probably also weigh on the mood in the real economy. The financing conditions for companies are likely to become less favorable, given the withdrawal of central banks from their ultra-loose monetary policy. Concerns about protectionism and fears that the increased external value of the EUR will dampen the export performance may have also contributed to the decline in business expectations.