German ZEW sentiment beats all expectations

The September ZEW survey sends two clear messages: 1) The rebound in economic activity from the Covid-19 mega recession continues in Germany and the Eurozone. 2) Conditions should improve further in the months ahead. Interestingly, renewed Brexit woes were not a fly in the ointment – at least, not yet.

After struggling to rise by much between June and August, the ZEW subindex for current economic conditions jumped to -66.2 points in September from -81.3 points the previous month (Chart 1). The 15.1 point jump is the biggest since 2015 and well above expectations of a 9.3 point gain. The share of panelists which judge the situation as bad fell by 14ppt from 82.4% to 68.4% (Chart 2). The headline expectations subindex also surprised to the upside by rising yet again – to 77.4 points in September versus 71.5 points in August and consensus expectations of 69.8 points. The share of optimists rose from 78.9% in August to 80.8% (Chart 3) – higher than ever since 2000. The Eurozone subindices reported similarly strong gains.

A positive performance of financial markets probably played its usual part (Chart 4). The DAX30 has gained more than 4% since the last ZEW survey was published on 11 August. Most of the ZEW panelists’ bread and butter is to follow closely the ups and downs of financial markets. Hence, ZEW sentiment usually correlates closely with financial markets, and vice versa, too.

In our view, the further gains in financial markets, and the improved assessment among ZEW panelists of the German and Eurozone economy, largely reflect positive trends. The hard data – retail sales, industrial production, exports – suggest activity is largely rebounding as we and many others expect – in a tick-shape manner. After initially rebounding strongly, the trajectory of the recovery has flattened, but continues firmly during Q3. The high-frequency data – such as footfall or the Bundesbank’s activity tracker – also point to an ongoing recovery in September.

Current virus experience provides reason for hope: While some parts of the Eurozone, especially Spain and France – and Germany to a lesser extent – experience a significant rise in confirmed new infections, the number of people in hospital and deaths remain much lower than in March/April. The risk that governments will have to impose harsh, nationwide lockdowns therefore remains low. At the same time, the experience of the US suggests that some changes in behavior and modest regional and targeted restrictions can suffice to contain the current Covid-19 spread in the Germany and the Eurozone. While such restrictions may (continue to) slow down the rebound, they will unlikely derail it.

Florian Hense

Economist

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