EU Economic Sentiment Expected To Return to Positive Territory

Sentiment Still Below Average, But April's Recovery Significant After 12 Recessionary Months

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German Institutions More Confident Than Before 

The ZEW independent institute will be releasing Germany’s economic sentiment today. The indicator is projected to cross above the zero barrier. This comes after a depressing period of 12 months where it recorded negative numbers.

The projection follows an array of four better-than-expected releases. However, it’s still miles away from the average of 22.2 points.

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Significant improvements show that institutional investors and analysts are less pessimistic about the state of Germany’s economy than they were before.

German ZEW Recorded -3.6 Points in March

We had not seen a figure like this since April 2018. While downside risks from Britain’s withdrawal from Europe deteriorated, US-China negotiations showed notable progress among financial markets. And that supported sentiment in Germany, and to a lesser degree, Europe.

Stepping into Q2 2019, Germany points to a relatively stronger growth as medium-term (6-month) economic expectations appreciate.

Considering the optimistic figures seen from last December and up to the end of Q1, the data is likely to jump to positive territory. However, a level of 0.9 may be considered as relatively optimistic as the economic conditions in Europe remain weak.

GERZEW

1.German VS. Euro Area ZEW

Expectations Showing Optimism

There are also forecasts for the ZEW indicator for the euro area to cross over to positive territory. Euro area ZEW marked an April 2018 high at -2.5.

Although the euro area projections are more optimistic compared to the German forecasts, the results since last December haven’t been nearly as good as in Germany. Besides the miss in January, the divergence between expected and actual is marginal. This is especially true when excluding March numbers.

Europe recorded an average of -13.3 in Q2 2019 while Germany recorded an average of -10.6 points. When looking at the divergence between actual and projected numbers too, Europe recorded a 4.46 point improvement per month in Q2. However, Germany marked a 3.96, numerically validating the more optimistic Europe.

German data also show that, on average, the indicator improved 4.63 points per month in 2019. However, the same test indicates that euro area sentiment advanced only by 1.13 month on month.

Euro area expectations of 1.2 may be too optimistic. When coupled with the leading German ZEW as the driver of Europe’s economic sentiment, an overshadowed EU figure will most likely have no effect on the FX markets.

We must all pay close attention to the German data!

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