Celebrate today but be aware of the future. This seems to be the main message of the just released ZEW index for the German economy. The index, which measures investors’ confidence, dropped to 6.4 in May, from 11.2 in April. At the same time , however, the current assessment component rebounded after two recent drops and came in at 53.1 in May, from 47.7 in April. While the current assessment component remains close to all-time highs, expectations are below their historical average. Compared with last month, investors look hardly impressed by the brief surge in the euro exchange rate and bond yields at the end of April. Now, with bond yields in lower territory again and the euro exchange rate being slightly weaker than in mid-April, only higher oil prices could be regarded as a big game changer. But then again, the recent increase in oil prices is rather growth-supportive for export-oriented economies like Germany.
Turning to the German economy, it looks as if the Eurozone largest economy is still on cloud number nine. Earlier this morning, Germany’s statistical agency released the second estimate of Q1 GDP growth. While the headline figure remained unchanged at the previous impressive 0.7% QoQ, the growth components revealed some interesting details about the current momentum of the German economy. It is all in the domestic economy. Consumption and investments were the main growth drivers in the first quarter, while net-exports turned out to be a drag on growth. Before anyone gets carried away, the increase in investments was not the start of a big investment boom which will make German growth more sustainable but just the result of a continuing construction boom. Over the last three years, investments in the construction sector have increased by a quarterly average of 0.8% QoQ, almost the same pace as during the last German real estate boom after reunification.
Even though the ZEW index is clearly not the best of all leading indicators, its current assessment component has recently shown a decent correlation with the Ifo headline index. In this regards, today’s ZEW index bodes well for tomorrow’s Ifo index release. Moreover, today’s ZEW index nicely reflects the current sentiment in financial markets: while the fears of a global recession at the beginning of the year have fortunately not come true, it is still too early to become overly enthusiastic about growth prospects for the coming next months.