ZEW points to robust growth

Today’s ZEW index adds evidence that the German economy is regaining momentum. The ZEW index which measures investors’ confidence increased in June to 38.5, from 36.4 in April. Its absolute level is clearly above the historical average. At the same time, investors have become somewhat more negative on the current economic situation. The current assessment component dropped to 8.6, from 8.9 in May; the third consecutive drop.

Recently, doubts about the strength of the German economy have emerged again. Several international institutions revised downwards their growth forecasts for this year, expecting almost no growth any longer. In our view, however, the German economy could surprise again. In fact, hard data available so far have been very promising: at the beginning of the second quarter, industrial production surged, the construction sector more than offset the entire output losses caused by the harsh winter weather and exports regained momentum. Only private consumption seems to have taken a breather.

Obviously, it is too early to give the official all-clear for a growth sprint of the economy in the second quarter but the ingredients are definitely there. The combination of sound fundamentals and a weather-driven catching up of the construction sector should boost growth. Looking further ahead, the German economy should cruise along rather smoothly, driven by the solid labour market, recent wage increases, low interest rates and a gradual recovery of external demand. The main risks for the German economy remain stagnating growth in its main Eurozone trading partners, above all France, and a hard landing of the Chinese economy. Contrary to common belief, even Abenomics and the recent depreciation of the yen hardly pose a risk for German exports. Why? German and Japanese exports differ significantly in terms of product and geographical specialization. This is reflected in the very low weight of the Japanese yen (roughly 3%) in Germany’s nominal effective exchange rate against 41 major trading partners. Just to illustrate: while the euro gained more than 20% against the yen since December, Germany’s real effective exchange rate (our favorite measure for export competitiveness) has appreciated by a meager 0.5%. Admittedly, the weaker yen could put some pressure on some German exports to Asian countries but at the macro level Abenomics is no reason to change the German growth outlook.

Doubts about the strength of the German economy have almost become a new ritual at the beginning of each year. Indeed, over the last couple of years, the economy has often had a rusty start. Sometimes due to the euro crisis, sometimes due to the weather. In the end, however, the economy always managed to leave (almost) all problems behind, defying critics and concerns. Of course, all good things come to an end at some point in time. For the time being, however, Germany’s economic growth seems to be like an old rock star: it can't get enough of comebacks.