Tuesday, September 18, 2012

ZEW points to soft landing of German economy

Soft landing continues. The German ZEW index increased in September on the back of the latest stock market rally and calm in the euro crisis. The ZEW index which measures investors’ confidence now stands at -18.2, from -25.5 in August; the first increase since April. However, the ZEW index is still far below its historical average. At the same time, investors have become somewhat more negative on the current economic situation. The current assessment component dropped to its lowest level since June 2010.

The relative calm in the euro crisis since the beginning of August seems to have comforted financial analysts. The German stock market has increased by more than 10% and fears about a looming break-up of the Eurozone have also disappeared. However, at the same time, the relative calm in the euro crisis has also created some adverse effects for the German economy. The euro exchange rate appreciated some 8% against the US dollar and oil prices increased by almost 10%. As a consequence, and somewhat ironic, the tail winds for the German economy, caused by the crisis, are fading away.

The German economy stands at another crossroads. After a strong first half, all sentiment indicators are pointing to an increased recession risk. However, the significant drop of sentiment indicators over the last months is not matched by the real economy. The third quarter, for example, also started on a very positive note. While industrial production and new orders rebounded in July, only retail sales were down, illustrating the relative robustness of the economy. However, it is doubtful that the decoupling between hard and soft indicators can last for long.

Looking ahead, weaker demand for German exports, both from Eurozone and non-Eurozone countries, should increasingly dampen growth in the period ahead. Moreover, with first signs of the labour market cooling off, private consumption should also remain moderate. Only domestic investments and, above all, construction seem to remain relatively crisis-resistant.

After more than a 3-year stretch of almost non-stop growth and an impressive average quarterly growth rate of 0.7% QoQ, the German economy s finally approaching for a landing. A soft, and not a hard, landing.

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