Strong ZEW reading in January

Still going strong. The German ZEW index dropped in January for the first time since July last year. The ZEW index, which measures investors’ confidence, decreased slightly and now stands at 61.7, from 62.0 in December. At the same time, investors have become significantly more positive on the current economic situation. The current assessment component accelerated to 41.2, from 32.4 in December. The strong equity market, the smooth tapering announcement and the possibility of further ECB action have clearly kept German investors in a positive mood. The ZEW index has not the best track record when it comes to predicting German economic activity. However, in the absence of other guidance for the future path of the economy, it’s worthwhile trying to squeeze out some essentials. Over the last years, the current assessment component has become a rather good leading indicator for GDP growth. In this regards, today’s sharp increase of the current assessment component is good news for the economy. Moreover, let’s not forget that the combination of a much stronger current assessment and only a marginal drop in expectations actually implies improved sentiment. The fundamentals of the German economy remain strong. However, in recent months, it has been rather difficult to identify the exact pace of economic growth as soft indicators have been more buoyant than hard economic data. Normally, one of the two will have to budge. In our view, there are sufficient arguments in favour of an acceleration of economic growth rather than in favour of a drop in soft indicators. Today’s ZEW readings fit perfectly into this picture. With a solid labour market, higher real wages, the gradual investment pick-up, filled order books and low inventories the German economy seems to be in the starting blocks for a growth acceleration this year.