ZEW improves but still points to soft landing

Soft landing continues. The German ZEW index increased in October on the back of fading short-term tensions in the euro crisis. Nevertheless, the ZEW index which measures investors’ confidence still stands in negative territory, now -11.5, from -18.2 in September. At the same time, investors have become somewhat more negative on the current economic situation. The current assessment component dropped for the fifth consecutive month.


Of course, the ZEW index is not the most credible leading indicator for the German economy. Particularly not during the last years as there has been a clear decoupling of financial market sentiment and the real economy; at least in Germany. Still, today’s ZEW index adds to the evidence of a soft, not a hard, landing of the German economy. The negative impact of the never-ending euro crisis and, even more important, of the global economic cooling should become visible in the second half of the year.

One year ahead of the next federal elections, the government is facing is challenging economic and political environment. The current slowdown has hardly reached the average German, but this could change. If unemployment starts to increase again in the coming months, new wage increases would not materialise due to increased global competition, and more attention would be paid to long-term issues linked to ageing (as for example, the recent debate about pensioners’ poverty, an increased number of working poor and the widening gap between rich and poor). This mix could put not only the German economy but also the entire Eurozone at the next crossroads. It is a mix which could eventually give rise to more Euroscepticism in Germany and could force both government and opposition parties to put their cards on the table, making the elections also a campaign on the future of the Eurozone. Latest statements by chancellor Merkel and finance minister Schäuble - hinting on more time for Greece, more powers for the budget Commissioner, a Eurozone set-up for the European Parliament, Treaty changes and even contemplating stimulus measures for the German economy – gave already some idea of their cards at hand.