Investor Confidence in Germany Set to Rise

German ZEW index to rise to 5.1 in May from 3.1 prevously

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The German economic sentiment index, a survey from the ZEW economic institute is due for release today.

Economists forecast that the sentiment could continue its uptrend. After rising 3.1 in April, the forward-looking sentiment index is forecast to tip higher to rise to 5.1 for May.

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The increase in the investor confidence would mark a six consecutive monthly increase after the index plummeted to -24.7 in October last year. The index trends aptly reflect the German GDP growth which was growing at a weaker pace since the second half of last year.

German ZEW
German ZEW Economic Sentiment Index

While the estimates are positive, the question remains whether this positivity will continue.

Growth in the eurozone is forecast to rise during the second half of the year. This is also evident from the fact that various economic indicators point to a modest rebound.

Domestic Factors Add to the Positive Outlook in the ZEW Index

The German auto industry was hit due to the new emission regulations. On top of this, concerns about tariff hikes on German exports also weighed on investors. And this is keeping the investor confidence in check.

In recent months, the auto industry is showing signs of stabilization. Given the fact that this industry contributes close to 14% of German GDP growth, an uptick in the sector could continue.

The most recent data support the positive expectations. German exports in the first three months of the year rose at the fastest pace since December 2018.

Exports grew at a pace of 1.5% on a month over month basis in March, following a revised 1.2% decline in February. German imports also grew 0.4% in March, following a 1.6% fall in February.

Industrial production data that came out over the last week grew for the second consecutive month. Meanwhile, other measures of activity such as the manufacturing PMI, eased slightly in April.

Germany’s construction and services sectors were also showing signs of a pickup in activity.

Despite the forecasts of the ZEW index rising to 5.1, the index still remains below its average of 20.3.

One of the major contributing factors to the positive uptick in April was the receding headwinds. The decision to delay the Brexit deadline to October this year added to the positive sentiment.

Can the ZEW Index Maintain the Trend Going Forward?

Bearing in mind that the survey came before last Friday’s breakdown in US-China trade talks, investors will be looking to see the reports for June.

As a result, there is the possibility that upcoming survey results could turn weaker amid concerns on global trade.

For the moment, the impact of the ZEW index is not likely to be big for the euro.

Unless there is some kind of deal with the world’s leading economies, we could expect to see some decline. But the report for May shows that there is scope for the index to continue to rise from the levels seen in April this year.

Last month, geopolitical tensions were somewhat subdued. In recent weeks, there have been rising tensions ranging from the trade negotiations to the US standoff with Iran.

The recent decision to hold re-elections in Istanbul is also seen as one of the headwinds for investor sentiment.

Having said that, investor sentiment in May is unlikely to spring any surprises. The chances of a big miss on the forecasts and the index slipping back to the negative territory is also low.

The ECB is contemplating the use of the TLTRO program in June this year. The new cheap round of financing could further add to the positivity among investors. The ECB had previously forecast that growth in the eurozone could return during the second half of the year.

This could very well be the case if the ZEW economic sentiment index starts indicating that this positive trend will remain.

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