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German investors have turned more optimistic about the next six months than they have been for much of this year, reflecting a growing belief that an economic turnaround is imminent as inflation falls and interest rates stabilise.
The brightening of investor sentiment is at odds with recent gloomy data pointing to a contraction in German output this year, but economists said the upswing in outlook reflected a sense that the most challenging conditions were set to ease.
The ZEW Institute’s monthly survey of investors in Europe’s largest economy found their outlook had brightened the most since March. Its index of German economic expectations jumped to 9.8 in November, up from minus 1.1 in October. That was higher than the reading of 5 forecast by economists in a Reuters poll.
“This reinforces the impression that the economic development in Germany has bottomed out,” said Achim Wambach, president of ZEW. “Turning points in expectations also appear to have been reached when it comes to inflation and short- and long-term interest rates.”
However, its index of sentiment about current conditions in Germany remained deep in negative territory at minus 79.8, only a slight improvement from minus 79.9 last month.
Germany has been hit by higher energy prices since Russia’s full-scale invasion of Ukraine last year and a downturn in global trade partly due to China’s weaker growth. Gross domestic product shrank 0.1 per cent in the three months to September from the previous quarter, reflecting falls in industrial production, exports and retail sales. Most economists expect a further contraction in the fourth quarter and only a tepid rebound next year.
“Growth is slowing, economic surveys are still poor and economic forecasts are being marked lower, but investor sentiment suggests that all these indicators will look a lot better by the start of 2024,” said Claus Vistesen, an economist at consultants Pantheon Macroeconomics, adding he was “sceptical” about the prospects of a quick rebound.
ZEW also found investors were becoming more upbeat about the outlook for the wider eurozone, despite their assessment of current conditions in the bloc deteriorating from an already low level.
The share of investors expecting eurozone inflation to fall in the next six months rose to three-quarters, while the proportion expecting short-term interest rates to be cut in that period increased to a fifth.
The European Central Bank, which last month held its benchmark deposit rate at 4 per cent after 10 consecutive increases, has forecast that eurozone GDP will recover next year as higher wages and lower inflation lift consumer spending power.
In a speech on Monday Luis de Guindos, ECB vice-president, said it was likely that eurozone activity would “remain subdued in the near term”, adding: “Weaker industrial activity is spilling over to services . . . and the impact of higher interest rates is broadening.”
But he added the bloc’s economy “looks set to strengthen over the medium term, as inflation falls further, household real incomes recover and demand for euro area exports picks up”.
Eurozone inflation has slowed from a peak of 10.6 per cent a year ago to 2.9 per cent in October. The ECB expects inflation to hit its 2 per cent target by 2025, but its president Christine Lagarde told the Financial Times last week that price growth was likely to reaccelerate in the coming months.
The central bank has forecast that GDP in the bloc will expand 1 per cent next year, up from 0.7 per cent growth this year. But economists at Morgan Stanley this week forecast eurozone growth of 0.5 per cent for next year, while those at Barclays predicted it would be just 0.3 per cent.