German economy disappoints with May IFO Business Climate Index estimates

This morning, the IFO Business Institute announced May’s initial estimate figures for the IFO Business Climate Index in Germany.

In contrast to the final figures for April 2024, released on Friday, the numbers fell short of expectations for Europe’s biggest economy.

In May 2024, the index’s figures dropped to 89.3 points, down from 89.4 points in April.

Most pessimistic IFO Business Climate numbers this year so far

The numbers broke what was previously a three-month winning streak for Germany’s business confidence, with February to April 2024 all experiencing rises in the index’s figures.

In contrast, last month’s final numbers, which were released on Friday last week, showed the index’s April figures climbing to 89.4 points, up from 87.9 points in March.

Against expectations

Forecasts for today’s reading expected a rise from 89.4 in March to 90.4 in April – meaning the numbers missed expectations significantly.

Meanwhile, the IFO Current Economic Assessment Index declined significantly to 88.3 points for this month, whereas analysts had forecast estimates around 89.9. points for May.

Significance of the IFO Business Climate Index

The IFO Business Climate Index, done monthly by the independent economic research and surveys institute the IFO, is widely considered one of the best barometers of the business climate in Europe’s largest economy.

By means of a survey, it measures entrepreneurs’ sentiment about current business situation and their expectations for the next six months. It represents answers from 9,000 firms in manufacturing, the service sector, trade and construction.

The readings of the index are phrased as the difference between the percentage share of executives that are optimistic about the next half year (in percentage points ranging from between -100 to +100) and which are instead pessimistic.

A higher percentage score for the month is considered a leading indicator that business will likely be good for Germany in the coming months – and, in extensions, potentially for the EU in total as well.

This is because higher readings indicate bullishness among the German private sector that its economy will do well in months to come.