May’s small fall in the German Ifo business climate indicator is something of a relief after the bigger declines in some other surveys like the ZEW and PMI. 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%.The rise in the 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 rise. But the fall in businesses’ expectations hinted that it may not be long before fears for Greece start to damage activity. The sectoral breakdown revealed that a decline in the manufacturing index was more than offset by a rise in the retail index, supporting evidence from this morning’s Q1 GDP breakdown that consumers and not exports are driving the recovery. Looking ahead, while consumer spending may slow as inflation edges up, exports should start to respond to the euro’s weakness and see GDP rising by a healthy 2% this year, says Capital Economics. But a Greek default and possible exit from the euro-zone are serious downside risks to the recovery.
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