width=221Release: Germany IFO Business Climate Index (December)
Consensus Forecast: 106.2
Previous: 106.6
Date/Time: 12/20/11 at 4:00AM ET (09:00 GMT)

Where Do German Business Executives See the Economy Going:

As we continue to monitor the European sovereign debt crisis and the prospects of recession in the euro zone we want to closely monitor the main locomotive for European growth - Germany. One of the best indicators we have, especially leading indicators, for the German economy is the Ifo business climate index. This is a measure of business executives expectations for the next six months in the country as well as a look at their current assessment of business conditions.

This index has seen a rather steep decline of late, in the second half of 2011, with expectations falling sharper than current conditions. That shows that the outlook for that economy is softening among business executives.

width=598

Economic data from Germany has been rather resilient of late with unemployment continuing to fall (-20K in October), factory orders surprising on the upside (5.2% gain in October), and services sector showing pickup in activity (flash services PMI rose to 52.7 from 50.3). Still the prospects of deleveraging by European banks, along with austerity measures by struggling sovereigns, will limit growth within the euro zone and therefore Germany's biggest market. With growth slowing in China and Asia as well, that makes for a weaker environment for Germany's exports. On the other hand, a low unemployment rate by historical standards may help to increase domestic spending which might offset softer exports.

The German Ifo business climate index is a timely indicator and will help encompass the reaction of executives to the most recent attempts by European politicians the stem the crisis. A lot rides on how the sovereign debt crisis develops obviously - if for instance Italy is frozen out of capital markets and the euro crisis worsens then the prospects for a recession in Germany increase. However if the crisis does not worsen it may be possible for Germany to avoid a recession. Tuesday's data gives us an insight as to how companies see the future.

3 Scenarios for the IFO Business Climate:

Stronger Than Expected Release - Germany Weathering the Storm, A Positive for the EUR:

The expectation for the December Ifo business climate index for a reading of 106.2, which would be lower than the November reading of 106.6. If it posts a stronger-than-expected release - above Novmber's reading - that would further solidify that Germany's economy remains resilient through the crisis and may bolster hopes for the first quarter. However with so many uncertainties abounding its important for Germany to continue to act as a engine for growth for the region. A better-than-expected report therefore may help boost sentiment for the euro helping it to perhaps further retrace some of its losses from last week and hold above the key level of 1.30 against the dollar.

Status Quo Release - Germany Growth Slowing, But No Recession on Hand (Yet):

If the Ifo index comes in as expected - slightly cooler than in November but not markedly so - that will buttress the case that the German economy is slowing but not at such a fast pace that recession in the first half is yet likely. We would have to continue to monitor developments in the banking and financial system in Europe as well as monitor the expectations for austerity programs and bond market reaction in Italy and in Spain. Will also want to see whether the drop comes from current conditions or future expectations in the report. A status-quo release therefore will likely weigh on the euro but the impact may be limited.

Weaker Than Expected Release - Germany's Showing the Strains of the Crisis:

In the scenario that the German Ifo business climate index comes in weaker than expected, below 106, it would mean that business executives do not have confidence in politicians current solutions to the crisis including the key EU summit from December 8th. It would mean further retrenchment in terms of expectations for growth and therefore would means slowing employments gains for the country. If the German economy deteriorates that would be a major negative for the euro and therefore the euro should be pressured by a downward surprise from this indicator.