German ZEW drops again in April

Starting to get petrified? The German ZEW index just dropped for the fourth months in a row. The ZEW index, which measures investors’ confidence, decreased significantly in April and now stands at 43.2, from 46.6 in March. At the same time, however, the current assessment component surged to the highest level since June 2011 and stands at 59.5, from 51.3. The geopolitical conflict close to Germany’s backyard, concerns about the Chinese economy and the recent equity market correction have clearly dented investors’ optimism. After the excellent start to the year, the German economy is now starting to feel some headwinds. In this regards, the latest drop in exports could have been a warning forerunner of a worse-than-expected export performance this year. Looking at the potential downside risks stemming from outside the Eurozone, a too strong euro is one of the least problems for the German economy. In fact, the discussion about a strong exchange rate has to be broadened beyond the euro-dollar rate. While the euro-dollar exchange rate is currently more than 7% higher than one year ago, the trade-weighted exchange rate of the euro has only strengthened by around 3.5%. Neither for the economy nor for the ECB this strengthening qualifies as – to use former ECB president Trichet’s word - being “brutal”. Today’s ZEW index sends two messages, which perfectly characterise the current state of the German economy. The economy had an excellent start to the new year, gaining new momentum. However, with the Ukraine crisis, Chinese uncertainties and emerging markets slowing down more and more gusts of wind, particularly from the East, could easily disturb real spring fever on the island of happiness.