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IFO Business Outlook Sours

German business expectations have deteriorated for the second month in a row, defying analysts' forecasts and intensifying the already challenging start to 2024 for Europe's leading economy. The ifo institute's expectations index fell to 83.5 in January, a decrease from the revised figure of 84.2 in the preceding month, contradicting the anticipated slight rise to 84.8. Moreover, the index that measures current conditions also saw a reduction, moving down to 87 from 88.5 a month earlier.


This downturn is in stark contrast with the earlier improvement indicated by the ZEW index in the same month. It underscores the prevailing sentiment's susceptibility to political uncertainties and the impact of strikes from various sectors including farmers and locomotive drivers. Despite some signs of normalization, the country is still wrestling with the residual impacts of subdued global demand and the energy crisis, and these effects are yet to be reflected in a tangible recovery for Europe's largest economy.


Our Take: The downturn in the IFO index represents a notable hurdle for recovery prospects and stands in contrast to other economic indicators. While the decline is not entirely unexpected, considering the multitude of challenges facing Germany, a persistent downward trend could prompt the European Central Bank (ECB) to reconsider its timeline and potentially enact its first rate cut before summer.


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