German ZEW strong in October

Still going strong. Today's ZEW index gives the impression that analysts believe in the invulnerability of the German economy. The ZEW index which measures investors' confidence increased once again in October and stands now at 52.8, from 49.6 in September. This is the highest level since April 2010. At the same time, however, investors have become slightly less positive about the current economic situation. The current assessment component dropped to 29.7, from 30.6 in September. The new dark clouds coming from the other side of the Atlantic have not yet blacked out analysts’ optimism. Today's ZEW index fits into the gradually improving picture of the German economy in the third quarter. After a disappointing start in July, all hard economic data has pointed to a stabilization of the economy at around its trend growth rate of 0.3% to 0.4% QoQ. The big unknown in this scenario of continued strong economic growth in Germany is the US debt crisis. Over the last years, the German economy often turned out to be debt crisis beneficiary. As long as the Eurozone debt crisis did not totally escalate, the German economy benefitted from low interest rates and a relatively weak exchange rate. At the current juncture, however, it is very hard to see how the German economy could benefit at all from the latest debt crisis: the US debt crisis. At best, an escalation of the US crisis could increase Germany’s safe haven status in international bond markets. Interestingly, Germany’s exposure to US government bonds is rather limited, amounting to roughly 1.5% of GDP. A further appreciation of the euro exchange rate and a sharp economic slowdown in the US would be a severe hit to the German economy. Let’s not forget that the US has again become Germany’s most important non-Eurozone trading partner. Today’s ZEW index confirms the positive prospects for the German economy. Let’s hope these positive prospects are still intact after the end of this week.