Eurozone deal boosts investor confidence

The outcome of last week's EU euro crisis summit has given German investor confidence an unexpected boost, data showed on Tuesday, but the positive surprise could prove short-lived, analysts warn.

Eurozone deal boosts investor confidence
Photo: DPA

The closely watched ZEW economic expectations index — which has fallen for nine months in a row and reached its lowest level in three years last month — showed a surprise rise of 1.4 points in December to stand at minus 53.8 points, the ZEW think tank said in a statement.

Analysts had been pencilling in a further decline after the index fell to minus 55.2 points in November, its lowest level since October 2008.

“The downward trend has come to a halt. Economic expectations seem to have bottomed out,” said ZEW chief Wolfgang Franz. “Financial analysts are clearly still expecting low growth, but not a crash of the German economy in the next six months.”

“The decisions taken at the latest EU summit will have had a positive effect on sentiment. Pending the finalisation of the actual details, those decisions mark an important step towards creating a functioning framework for monetary union,” Franz said.

Nevertheless, at its current level, the ZEW barometer was still way below its historical average of 24.6 points and while the sub-index measuring analysts’ assessment of the current economic situation remained in positive territory, it fell for the fifth month in a row, the think-tank noted.

Nervousness arising from the eurozone debt crisis has weighed on investor confidence for several months now “and with the index still in negative territory in December, that points to an economic slowdown in the coming half-year,” ZEW said.

Nevertheless, a raft of recent economic data showed that the German economy, Europe’s biggest, is holding up fairly well to the sovereign debt crisis so far even if growth is widely expected to slow noticeably next year.

At a make-or-break summit last week, EU leaders banded together to back tighter budget policing in a desperate bid to save the eurozone.

After years of foot-dragging on deepening integration, 26 of the 27 EU states signalled their willingness to join a “new fiscal compact” to resolve the debt crisis threatening to crack apart the monetary union. Initially, financial markets showed relief at the outcome.

But European shares fell again on Monday as the international credit rating agency Moody’s said Europe had failed to deliver “decisive policy measures” to fix the eurozone debt crisis and it would put all EU sovereign debt ratings under review as a result.

Analysts were therefore wary about reading too much into the latest ZEW data and said Germany may still be headed for recession.

“The slight improvement in confidence may prove temporary,” said Berenberg Bank senior economist Christian Schulz. “Even though the summit did deliver the expected results, additional action from the European Central Bank remains elusive.

“More and more investors fear that the German economy may already be grinding to a halt as an effect of the confidence crisis. As the euro crisis continues, Germany is likely to fall into recession with the rest of the currency zone this winter,” Schulz said.

Jennifer McKeown, senior European economist at Capital Economics, agreed.

“Despite rising slightly in December, the German ZEW index points to a risk of recession in the coming months,” she said. “The increase did not reverse last month’s fall and the current level means that a large majority of investors still expect conditions to deteriorate in future.”

The ZEW is not always viewed as a particularly reliable predictor of the future direction of the economy and “more reliable business surveys paint a less gloomy picture,” McKeown noted.

“But even they suggest that the recovery has ground to a halt,” she said, predicting a contraction in the economy next year “as the debt crisis intensifies and the eurozone starts to break up.”

Barclays Capital Research economist Thomas Harjes was not so pessimistic.

“The latest ZEW figures add further evidence to our view that, following a soft patch and some negative growth in the fourth quarter, German GDP (gross domestic product) will record modest, positive growth again in early 2012,” he said.


Member comments

Log in here to leave a comment.
Become a Member to leave a comment.


German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.