German ZEW shows investors upbeat despite fall in equity prices – Capital Economics

February’s small fall in German ZEW investor sentiment reflects the decline in equity prices rather than broader concerns about the economy, and investors still expect economic conditions to improve, according to Jennifer McKeown, Chief European Economist at Capital Economics.

Key Quotes

“The dip in the headline Economic Sentiment Indicator (ESI), from +20.4 to +17.8, was smaller than we or the consensus had expected given movements in equity markets over the past month (the consensus forecast was +16.0). Investors do not seem to think that the falls have seriously affected the outlook for the German economy over the next six months. Indeed, the fact that the ESI is firmly in positive territory means that the majority still see conditions improving. The current conditions index fell slightly too, but from a very high level, and it has tended to lag developments in the hard data in the past.”

“With equity prices still higher than a year ago, their recent declines seem unlikely to do too much damage. And while the euro’s strength and the slowdown in China are more worrying for Germany’s prospects, for now export orders are very strong. Meanwhile, the likely formation of a Grand Coalition Government should mean some fiscal support for households over the next couple of years, which, combined with a moderate pick-up in wage growth, should boost household spending. We still expect the Germany economy to expand by an above-consensus 2.7% this year and 2.0% next.”