*** PDF version incl. charts is attached ***

German ifo business sentiment fails to recover

Oct 2001				Actual	UBSW fc	Market	Previous
Headline index (1995=100)	84.7		86.0		85.0		
85.0
Balance - total			-26.2		-23.6		-18.7	
	-25.6
Balance - current conditions	-27.0		-26.4	 	na 	
	-27.7
Balance - expectations		-25.4		-20.7	 	na 	
	-23.5

n In contrast to our forecast, the ifo index of west German business 
confidence failed to recover from the shock level of September. The 
drop in the headline index of 0.3 points is not particularly worrisome. 
However, the further decline in business expectations suggests that 
production, investment and most likely employment plans have been 
slashed further at the beginning of Q4.

n Although we continue to look for a stabilisation of the ifo index 
soon , today?s data suggest that GDP will contract in the current 
quarter, consistent with our forecast. They also cast doubts over the 
expected output recovery in the early months of 2002.


The bad news in today?s ifo data is not the slight decline in the 
headline index. This alone would only have underpinned forecasts of 
industrial production and GDP decline in Q4 which is a consensus view 
anyway. The really bad news is the further fall in business 
expectations from what was considered to be an exaggeratedly weak 
post-attack shock level. It suggests that German companies are still 
far from concluding the ongoing process of adjustments in output, 
investment ad employment.

Therefore, today?s further ifo decline not only underpins forecasts of 
two consecutive GDP declines in German in Q3 and Q4, but also 
challenges the widely held expectation of a recovery in industrial 
output early next year. Chart 1 suggests that the latest ifo pattern 
has increased the risk of a double dip in German production growth. 
Despite the bad news, however, we continue to believe that the ECB will 
not cut rates further this year, but prefer to wait until early 2002 
with the next reduction in the refinance rate.

_______________________________________________
Holger Fahrinkrug
Senior Economist
UBS Warburg AG
Stephanstra?e 14-16, D-60313 Frankfurt, Germany
Tel. +49 69 1369 8280
Fax +49 69 1369 8221
Email: holger.fahrinkrug@ubsw.com