German ZEW continues rebound

Leaving the bottom behind? The German ZEW index increased in January, for the second months in a row. The ZEW index, which measures investors' confidence now stands at -21.6, a huge increase from -53.8 in December. At the same time, the current assessment component continued its recent rebound, increasing to 28.4, from 26.8.

It is almost official that the impressive German recovery came to a halt in the last quarter of 2011 when the economy finally started to feel the pain of the Eurozone debt crisis. There is a wide-spread fear that, similar to 2008, the German economy could now also follow the downward trend of its Eurozone peers, only with a lag. Austerity measures in almost all other Eurozone countries should also take their toll on the German economy. However, this is not 2008. Compared with early 2008, the labour market is stronger, consumers look more optimistic and corporate seem better prepared to weather a storm. At the same time, the safety new of low inventories and high backlog orders has become thinner over the last two months.

In addition to probably the soundest economic fundamentals of all big Eurozone countries, the German economy should actually again benefit from the Eurozone debt crisis in the coming weeks and months. With more than 60% of all exports going into non-Eurozone countries, Germany is amongst the main beneficiaries of the recent euro weakness. Moreover, the latest downgrades of nine Eurozone countries have rather strengthened than weakened Germany’s safe have role, keeping government bond yields at record lows. Even if the EFSF’s downgrade has theoretically increased the risk that Germany’s guarantees might eventually be used, the total amount of 16bn euro issued so far for Ireland and Portugal is too small to seriously be concerned.

Of course, the debt crisis has covered the outlook for the German economy with a veil of uncertainty. However, today’s ZEW reading adds evidence that the trough of negativity might be behind. With sound fundamentals and positive side effects from the crisis, Germany is one of the few Eurozone countries where the glass is currently rather half-full and not three-quarter empty.