Germany’s economic outlook received an unexpected boost in December, thanks to growing confidence that the European Central Bank (ECB) may soon cut interest rates as inflation continues to drop. According to a monthly survey, the ZEW Indicator of Economic Sentiment, which measures expectations for the next six months, saw a 3.0 point increase to reach 12.8 in December. This positive outcome surpassed economists’ predictions, who had expected the indicator to drop to 8.0.
The survey revealed that more respondents now anticipate interest-rate cuts from the ECB in the medium term, compared to November. Additionally, there is a growing belief that inflation will decrease further. ZEW President Achim Wambach noted that this development is particularly beneficial for the German construction industry, which has seen a notable increase in optimistic expectations this month.
Germany’s Construction and Industrial Sector Show Positive Signs
Germany’s construction and industrial sector have experienced a slow growth rate in recent months due to higher interest rates impacting investment. However, there are promising indications of improvement as a purchasing managers’ survey revealed a noticeable increase in sentiment in November.
ECB Meeting and Rate Expectations
The European Central Bank (ECB) is scheduled to meet on Thursday, and economists anticipate that the central bank will maintain current interest rates. According to Refinitiv data, markets are already factoring in a potential rate cut in April.
Overcoming Obstacles
Despite facing a budgetary deadlock within Germany’s coalition government, there is still an optimistic outlook for the economy. This deadlock arose following a ruling by Germany’s top court which deemed the use of 60 billion euros ($64.60 billion) of unused pandemic-era funds as unconstitutional.
The potential economic recovery of Europe’s largest economy, which experienced a 0.1% contraction in the third quarter, may be jeopardized by this ruling. However, the improvement in the purchasing managers’ survey indicates that there is hope for progress.
Germany’s Economy Set to Rebound in the New Year
According to the latest ZEW indicator, there is hope for a rebound in Germany’s economy in the coming year. Despite experiencing another contraction in the fourth quarter of 2023, experts believe that the recovery may face obstacles due to delayed public spending caused by the fiscal impasse. Additionally, the lagged impact of the ECB’s monetary tightening may further hinder the economy’s progress.
Melanie Debono, a senior Europe economist at Pantheon Macroeconomics, highlights these challenges in a research note. However, she remains optimistic about the potential for growth in Germany’s economy moving forward.
Struggles and Opportunities Ahead
The ZEW indicator provides insights into the economic outlook, indicating a potential upturn in Germany’s economy. Although the country faced a contraction in the final quarter of 2023, there are reasons to be hopeful for the future.
Delayed Public Spending
One major hindrance to the economy’s recovery is the risk of delayed public spending due to a fiscal impasse. This could impede the injection of funds needed to stimulate growth and support various sectors.
Impact of Monetary Tightening
The European Central Bank’s (ECB) monetary tightening measures may also have a lagged impact on Germany’s economy. As these policies take effect, they could create additional challenges for businesses and individuals alike.
Expert Insights
Melanie Debono, a senior Europe economist at Pantheon Macroeconomics, remains cautiously optimistic about Germany’s economic prospects. Despite the potential roadblocks that lie ahead, she notes the possibility of a rebound in the new year.
By Ed Frankl
