German investor confidence has increased sharply this month in the latest evidence of a marked brightening in prospects for Europe’s largest economy.
The Mannheim-based ZEW institute said its “economic sentiment” indicator had risen to the highest level since March 2004. Optimism had been fuelled by world economic developments, which remained sound, “but also by [the] first signals of a revival in domestic demand”, ZEW said.
The fact that the index rose in spite of worries about higher oil prices suggested “the underlying cyclical momentum is still quite strong”, said Jörg Krämer, economist at the bank HVB in Munich. ZEW noted a distinct improvement in confidence about the current economic situation, which it attributed to increased industrial output.
The delayed effects of a weaker euro may also still be feeding through into exports. Investor confidence and German share prices have also been boosted by the prospect of a centre-right government led by Angela Merkel, leader of the Christian Democratic Union, after elections on September 18.
However, fears Germany’s election system might result in a fractious “grand coalition” between the CDU and Social Democrats may have damped expectations more recently and economists remain cautious about the strength of any German upswing. Holger Schmieding, economist at Bank of America, warned that expectations were fickle and that “the economic upswings heralded by major surges in the ZEW in mid-2002 and early 2004 both turned out to be disappointingly shallow and short-lived”.
A better indication of German economic trends may emerge from Wednesday’s business confidence survey by the Munich-based Ifo institute.
Separately, detailed gross domestic product figures for the second quarter, released by the federal statistics office, underlined the fragility of German economic growth and the exceptional weakness of consumer spending. Private consumption fell by 0.3 per cent, in the second quarter, after a 0.5 per cent fall in the first quarter. However, investment in machinery and equipment grew by 0.6 per cent, after a 1.6 per cent rise in the previous three months. Overall, economic growth was not revised from the zero growth reported for the second quarter earlier this month.
The European Central Bank has long argued that economic activity in the eurozone will pick up gradually in the second half of the year, a stance that has gained credibility in recent months. The ECB next week holds its first rate-setting meeting after the summer break but is expected to keep its main interest rate unchanged at 2.0 per cent for the 27th month running.
