Carsten Brzeski’s blog

German ZEW index bows under market pressure

Hit by the market turmoil. Growth prospects for the German economy have taken a hit from latest market turbulences. At least 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 1.0 in February, from 10.2 in January, and now stands at the lowest level since October 2014. At the same time, the current assessment component fell to 52.3, from 59.7 in January. Against the background of the latest market turmoil, this drop in investors’ sentiment is anything but a surprise. Tumbling stock markets, a stronger euro and more general concerns about the global growth outlook have clearly dented optimism about the German economy’s growth prospects.

With these disappointing sentiment data, market participants will look even closer at possible next steps by the ECB. The period in which more or less everyone tries to give the ECB advice on what to do at the next meeting should gradually come to an end. With the release of the January’s meeting minutes on Thursday, the discussion should start to move to what the ECB actually can and wants to deliver in March. In our view, official ECB comments since the January meeting suggest two things: one, the ECB is trying hard to temper and align market expectations to avoid another disappointment as after the December decision; and, two, banks as the crucial link and transmission channel between ECB measures and the real economy are in the limelight again. Particularly the latter is a big concern for the ECB as it shows the limits of what monetary policy can do. With growing despair and fears of monetary policy’s impotence, the ECB will either have to decide on new bold and unprecedented measures or revert to “more-of-the-same”. Given institutional, legal and political constraints, the “more of the same” option seems in our view the most likely one for the March meeting.