A mixed German August ZEW Survey

The German August ZEW Survey was one of the most important European data releases this week. It was a mixed report. The current situation assessment is slightly deteriorating again, sliding 0.4 points to land at 81.3 points, which is below consensus. On top of that, many panelists mentioned as a key concern for the coming six months the poor financial situation of the banking sector and insurers due to the prolonged period of negative interest rates and risks related to an increase in non-performing loans from Q4 2020-Q1 2021 due to the expected wave of bankruptcies following the COVID-19 recession. This is nothing new, but it will certainly contribute to influencing the panelists’ mood in the coming months.

However, there are also some encouraging signals that will probably be the main market focus this morning:

1. The current economic sentiment by sector continues to improve, salvaging the hopes for general recovery in the coming months. Without much surprise, panelists are more optimistic for sectors most exposed to domestic demand, such as utilities or construction, that should benefit from the resilience of the German labor market, the increase in household saving rate during the lockdown and higher public investment as part of the ambitious stimulus package unveiled in past June. But even sectors most exposed to global trade dynamics and foreign demand show signs of continued improvement. The current economic sentiment for the car industry, which represents roughly 14% of Germany’s GDP, is out at minus 15.9 vs an annual low point at minus 80.7 at the start of the lockdown. The August print is the highest level since Spring 2018.
   
   
2. Economic expectations are heading north again. As expected, the split in the expectations subindex in July (by 3.4 points to 59.3) was not synonym of new downward trend. In August, the subindex jumped again by 12.2 points to 71.5 which is the highest level reached since early 2004 and the largest growth since past May. It is standing way above its long-term average of 19.5. This new jump confirms optimism prevails among panelists concerning the future of the German economy. This dominant optimism is mostly fueled by the ongoing economic normalisation following the lifting of lockdown, hope of beating COVID-19 with the promising development of different vaccine technologies and continued stock market gains (with an increase of more 20% of the German DAX over the past three months).

These statistics tend to point out that the pick-up in activity in Germany is not doomed to slow significantly anytime soon and that the economic comeback continues in Q3. This scenario is also corroborated by the Eurozone August ZEW Survey that was released at the same time this morning. The economic sentiment was up by 4.4 points at 64 points, marking the highest growth rate since May. That being said, we acknowledge that current process of economic normalisation is not without challenges. There is still a lot of uncertainty regarding the path of the economy in the coming months. The risk of second COVID-19 wave in Europe is not off the radar, meaning that some very localized lockdowns could be implemented here and there, and global trade, which is a key GDP driver in Germany, is probably doomed to remain gloomy at least until the end of the year, based on all the data we have gathered, especially from Asia (see here our latest analysis about global trade).

Charts: German ZEW Current Economic Situation (by Sector) and German ZEW Economic Expectations.