Investors upbeat about economic rebound in Germany this year

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Investors have become more optimistic about Germany’s prospects this year, reflecting increasing confidence that the eurozone’s largest economy will return to growth amid falling inflation and expectations of interest rate cuts.

ZEW Institute’s monthly survey of investors’ near-term expectations for Germany, published on Tuesday, rose 4.7 points from last month to 19.9, the highest reading for a year and more than double the average forecast of economists polled by Reuters.

The fourth consecutive rise in investor outlook contrasts with a gloomier mood about Germany’s present fortunes.

The survey’s index of current sentiment on the German economy fell 4.4 points to minus 81.7, the lowest result since June 2020. German gross domestic product contracted 0.3 per cent last year, making it the worst-performing major economy, according to the IMF.

Pointing to the survey’s “conflicting messages”, Claus Vistesen, chief eurozone economist at Pantheon Economics, said: “The headline index is strong, but the current conditions index is almost universally negative as the domestic economy in Germany is basically in a recession.”

The same ZEW index found that German respondents were more bullish on the broader European economy’s prospects for the next six months, with the index rising 2.3 points from January to reach 25. Current sentiment for the eurozone also rose, up 5.9 points to minus 53.4.

German inflation fell faster than economists predicted in January to 2.9 per cent, down from 3.7 per cent in December, according to the federal statistical agency. Falls in other eurozone economies have increased expectations among investors that the European Central Bank will cut interest rates in the first half of this year.

High energy prices, lower industrial output and train strikes contributed to Germany’s downturn last year, analysts said.

“The rise in expectations is better than expected, and the German economy is bottoming out,” said Oliver Rakau, chief German economist at Oxford Economics. “This is good news . . . people are getting the idea that the worst is over.”

The eurozone’s largest economy is expected to pick up later this year, with the OECD predicting output growth of 0.6 per cent in 2024, still well below growth expectations for other developed economies and other countries in the eurozone. 

In a speech on Monday, German finance minister Christian Lindner rejected the notion that the country is the “sick man of Europe”, but said the country must fix structural problems. 

“We are an unfit man,” said Lindner. “We are not in the best shape because our structural deficits have been covered by low interest rates, demand from the world market, and energy imports. Now, with [that] coverage gone, we need to focus on our structural problems.”

Many economists warn that Germany’s economy will continue to struggle this year, even as it returns to tepid growth.

“Things will not pick up until the second half of 2024, and even then it will only be a weak recovery,” said Andrew Kenningham, chief Europe economist at Capital Economics.