The German ZEW, a closely watched survey reflecting the current and future economic sentiment in Germany, revealed that investors’ sentiment over the coming six months increased in May. However, while German investors remain optimistic for the short-term, they see the current conditions as the worse since 2003.
The ZEW is a survey of German businesses that asks business managers to answer questions related to the current and future state of employment, factory orders, financial constraints, and so on. As Germany is the economic powerhouse in Europe, financial markets participants take clues from the German economy and use them as a benchmark for the Eurozone as a whole.
Germany, the world’s fourth largest economy, fell into recession in the first quarter of 2020. Due to the coronavirus pandemic and the fact that most of the major businesses in the country shut down, the recession is likely to deepen into Q2.
Future Looks Optimistic
The forward-looking economic sentiment jumped at the highest level since April 2015, way above market expectations. The release showed 51.0 compared to the forecasted 33.5 and way above the previous month’s 28.2.
During normal market conditions (i.e., when investors focus on interpreting economic data to predict turns in financial markets) and not when facing a pandemic, such data would move the Euro. Throughout the past years, often, the German ZEW survey was one of the most expected pieces of economic data for traders interested in how Germany is performing. These days, though, investors largely ignored it.
Nevertheless, the ZEW has a good track record of predicting turning points in the economy. If that is correct, the optimism for the period ahead may indicate a turning point in the German and European economic activity.
While the release is very bullish for markets and the economy, some view the report as showing too much optimism, taking the release with a pinch of salt. The idea is that, as the German economy, like many other economies in Europe and around the world, reached or are close to reaching rock bottom, there is no other way than to grow moving forward. More precisely, it cannot get worse than a recession created by a pandemic.
Regardless of the market’s reaction, investors know that the power of ZEW in predicting turning economic points. Future data in the coming several weeks will prove if ZEW was right or not.