By Ed Frankl
Germany’s economic outlook improved unexpectedly in December, reflecting a stronger belief that the European Central Bank could cut rates soon as inflation ticks down further, a monthly survey said Tuesday.
The ZEW Indicator of Economic Sentiment, which tracks expectations for the next six months, rose 3.0 points on month to 12.8 in December. That was better than expectations for the indicator to fall to 8.0, according to a consensus of economists polled by The Wall Street Journal.
The reading, the highest since March, was driven by the share of respondents expecting ECB interest-rate cuts in the medium term doubling compared with November, while there was also increased belief that inflation is set to fall further, ZEW President Achim Wambach said.
“This, in turn, is good news for the German construction industry, for which we observe significantly more optimistic expectations this month,” he added.
Germany’s construction and industrial sector have been economic laggards in recent months, as higher interest rates have turned the screw on investment, but there are signs that the environment could be improving after a purchasing managers’ survey showed sentiment improved noticeably in November.
The ECB meets on Thursday, with economists widely expecting the central bank to hold rates. Markets are pricing in a first rate cut in April, according to Refinitiv data.
But the improvement in the indicator comes despite a budgetary deadlock in Germany’s coalition government, after Germany’s top court ruled that using 60 billion euros ($64.60 billion) of unused pandemic-era funds was unconstitutional.
That could threaten an economic recovery in Europe’s largest economy, which contracted 0.1% in the third quarter.
However, the ZEW indicator suggests that Germany’s economy will rebound in the new year–after contracting again in the fourth quarter of 2023–even if the recovery will be hampered by the risk of delayed public spending because of the fiscal impasse, as well as lagged impact of the ECB’s monetary tightening, Melanie Debono, senior Europe economist at Pantheon Macroeconomics said in a research note.
Write to Ed Frankl at [email protected]
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