Blog Carsten Brzeski

German ZEW index increases in December

Some light at the end of the tunnel? This seems to be the main message of the just released ZEW index for the German economy. The index, which measures investors’ confidence, increased to 16.1 in December, from 10.4 in November; the second increase in a row. At the same time, the current assessment component rebounded somewhat, increasing to 55.0, from 54.4 in November. It seems as if investors have somehow overcome their disappointment after the ECB meeting and have become more optimistic about the growth prospects of the German economy. Low oil prices seem to have offset a slightly stronger euro exchange rate.

It is hard to extract any strong guidance from today’s ZEW index for the future path of the economy. In fact, both components have a rather poor track record when it comes to predicting GDP growth. . Nevertheless, the ZEW index has sent some important signals in the past when it came to turning points in the economy. In this regard, the discrepancy between the current assessment component and expectations is remarkable. This discrepancy had reached a new temporary peak in the late summer but has now narrowed somewhat over the last three months, suggesting that a standstill of the economy should not be feared.

Generally speaking, despite another very turbulent year with the Greek crisis, the Chinese slowdown, the refugee influx and increased geopolitical tensions, the German economy has continued its solid growth performance. Domestic demand, and in particular private consumption, has become an important growth driver. Looking ahead, the economy should continue its current positive, though not breathtakingly strong, momentum next year, with possibly the biggest risks stemming from too low oil prices and the political side effects from the refugee inflow.