Germany is heading into a period of increased economic uncertainty. And this just might be enough to weigh on the outlook of the whole eurozone.
Most of the focus is on the spread of the covid delta variant, but there are plenty of other issues going on that could move the currencies.
One thing to note for the delta variant, which caused the latest spike in cases in the UK, is the two-month span from start to peak.
Most of Europe has now caught up with the UK’s vaccination rates. Fully vaccinated adults make up over 70% of the population. The spike in the UK started about a month before it did on the continent. This suggests that there might be another month before Europe starts to see their case numbers decrease.
Is the current spike in cases the only reason for the increased economic uncertainty?
Where we are going
In Germany’s case, the increased covid cases could be a complicating factor, because Germans might be going to the polls near the peak of delta variant cases. Should the German government take measures to control the spread, which are increasingly unpopular, it might have an effect on the federal elections.
Back in May, before the lockdowns were lifted, the Greens party bested the CDU/CSU in the polls.
Since then, the outcome reverted, with moderate center-right Armin Laschet taking the lead to be the favored upcoming chancellor. However, the latest polling has once again shown the CDU/CSU losing support to the opposition.
So are the most recent poll results a mere coincidence with the rise of covid cases?
Is optimism even possible?
Naturally, the markets and businesses don’t like uncertainty.
Should the opposition win the elections, the Greens candidate Annalena Baerbock will lead. And there is a general understanding that she isn’t very favorable towards businesses.
Additionally, the Greens have never held the highest office in the country. That said, there isn’t a prior history that analysts can reference to get a clearer understanding of what their policies will be like.
Meanwhile, Germany has yet to return to its anemic pre-covid economic growth.
There has been some optimism about recovery, but as Germany approaches normalization, there could be some loss of optimism. Businesses were under significant pressure before covid, and analysts aren’t expecting things to be any better after covid.
What to look out for
Economists anticipate tomorrow’s ZEW Survey for Germany to show a narrowing between the current situation and the outlook.
This would suggest that German businesses are holding back slightly in the face of increased uncertainty, even as the situation improves.
They also expect the ZEW Current Condition to remain broadly pessimistic while showing an improvement to 30.0, from 21.9.
Generally, that would be considered a significant move. But given how far into a contraction the figure is, it’s more accurate to say that it’s a transition from awful to terrible.
Lastly, the expectation for ZEW Economic Sentiment (businesses’ predictions for where things will be in six months), is to drop substantially from 63.3 to 57.0.
