German Ifo still points to strengthening recovery

May's small fall in the German Ifo business climate indicator left it consistent with pretty strong growth and came as a relief after bigger falls in other surveys. But the decline in businesses' expectations may warn of a slowdown to come. 

The decline, from 108.6 to 108.5, was smaller than the consensus forecast of a dip to 108.0. It did not reverse April's rise. 

Broadly speaking, the Ifo still looks consistent with a rise in German annual GDP growth from Q1's 1.0% to about 2.0%. It therefore paints a brighter picture than the PMI, which points to quarterly gains of 0.2%, or 0.8% annualised. 

The rise in the Ifo current conditions component from 113.9 to 114.3 left it at its highest level since last June and suggests that growth will pick up in the near term after Q1's disappointing 0.3% quarterly expansion. 

But the fall in businesses' expectations hinted that it may not be long before fears for Greece start to damage activity. Note that the previously-released Sentix and ZEW surveys revealed falls in German investors' expectations for the economy too. 

The sectoral breakdown showed that a decline in the Ifo manufacturing index was more than offset by a rise in the retail index. This supported evidence from this morning's Q1 GDP breakdown that consumers and not exports are driving the recovery. Consumer spending rose by 0.6% and investment posted a healthy 1.5% gain. But a sharper rise in imports than in exports meant that net trade acted as a drag on GDP, leaving the economy to expand by a modest 0.3%. 

Looking ahead, consumer spending may slow as inflation continues to edge up, but exports should start to respond more strongly to the euro's weakness, says Capital Economics. Accordingly, German GDP seems rising by 2% this year and 1.5% next. But a Greek default and possible exit from the euro-zone are big downside risks to the recovery.