Don't listen to those gloomy Germans.

Don't listen to those gloomy Germans.

Don't listen to those gloomy Germans.

Moneybox
Commentary about business and finance.
April 6 2005 4:43 PM

Gloomy Gustavs

Obscure Economic Indicator: Germany's Ifo Index.

Here's an Obscure Economic Indicator for pessimists. Every month, economists and investors eagerly anticipate the release of a survey from Germany's Ifo Group, an economic consulting and research organization. The index, which measures German business sentiment about today's economy and expectations for the future, is supposed to provide a crucial window on the European economy. The European Union is the U.S.'s largest trading partner, and Germany has traditionally been the EU's economic motor.

Judging by recent results, the next survey—to be released April 25—won't be pretty. The March 2005 Ifo Business Climate Index presented the bad news with dour Teutonic certainty (and none of the gentle spin we expect from American forecasters like the Conference Board): "The Ifo Business Climate Index for German industry and trade declined further in March, after having already fallen in February," it said. "The assessment of the current situation has now declined three times in a row. … Especially the hope for a recovery of investment demand has not materialized."

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The numbers clearly show that Germans don't think the present is a particularly good time to be doing business in their homeland. And that's not surprising, given the tough labor laws, a lack of entrepreneurship, and a government that seems clueless.

But an examination of the Ifo's history reveals an odder phenomenon. Germans are always gloomy about their economic prospects. Here's how the Ifo Index is calculated. Essentially, every month more than 7,000 businesses across Germany are asked to assess the business situation (good, satisfactory, poor) and their expectations for the next six months (better, same, worse). Ifo weights the responses to create an index that shows the level of optimism or pessimism relative to 2000. It also calculates the balances for each measure—the difference between the number of respondents giving the highest of the three ratings and those giving the lowest.

This time series going back to 1991 shows that the respondents are more pessimistic than optimistic virtually all the time and for every measure. You would think that the miracle of Germany's reconstruction, the astonishing development as an industrial powerhouse, the three World Cup championships, and the glorious reunification would have done something for the national psyche. But no. In the early 1990s, Paul Tsongas claimed that Germany and Japan were the true victors in the Cold War. But the Germans disagreed. In 1991, Ifo respondents briefly measured significant optimism about the current business climate, but not for future expectations. Since then, it's been all downhill. In 171 monthly Ifo readings, Germans were positive about their future only 43 times. But this seems Panglossian compared with Germans' assessments of their present situation, which have been optimistic only 15 times. Since February 1992—157 months—assessments have been positive only once, in May 2000.

Which raises the question: What is the point of measuring the confidence of a group that is always pessimistic?

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The negative sentiment and expectations might represent a rational reaction to the situation on the ground? Germany's economy has suffered several years of subpar growth—0.8 percent in 2001, 0.1 percent in 2002, minus 0.1 percent in 2003, and 1.7 percent in 2004.

But Germany had plenty of perfectly respectable years in the 1990s, in which the economy grew at a decent clip, jobs were created, and companies' profits rose. But the Ifo survey participants always found a dark lining for their silver cloud. While the Americans were in the grips of irrational exuberance, the Germans were seized by irrational nonexuberance. Even in 2000, a good year by Germany's standards, sentiment was muted.

It could be that there's something cultural at work here. The 20th century was punctuated at its beginning and middle by disasters resulting in part from an excess of German enthusiasm. Could German businesspeople suffer from some lingering sense of shame or self-consciousness over the fact that the world starts to get upset whenever Germans get too enthusiastic about anything?

Germany's low self-esteem may also be aggravated by the fact that it's losing leadership in Europe. "The world economy is booming at a pace not experienced for 28 years, but the German economy is not participating," Ifo noted in its forecast last December. "Germany has become decoupled from world economic activity and continues to lag behind the growth average of the old EU countries." Indeed, on Monday, the European Commission reduced its estimate for growth in the economy of the 12-nation Euro bloc for 2005 from 2 percent to 1.6 percent, in part because it expects Germany's economy to grow at a meager 0.8 percent this year.

Given the recent developments, it's likely the April reading will show more German pessimism. That's the bad news. The good news is that Germany's gloom doesn't necessarily spell doom for Europe's economy. When it comes to economic forecasting, Germany is like Lake Wobegon in reverse. The business climate is always below average.