Germany: Levelling off

The latest ZEW index paints a good picture of how the recovery of the German recovery could evolve.

After the initial V-shaped recovery in May and June, a levelling off in the first summer months looks highly likely. In July, the ZEW index, which measures financial analysts’ assessment and expectations of economic and financial developments, dropped for the first time since February this year, to 59.3, from 63.4 in June. At the same time, the current assessment component improved somewhat to -80.9, from -81.3 in June.

Given that traditionally, the ZEW index has a better track record in predicting turning points in the economy, rather than predicting exact outcomes for GDP growth, it is interesting to look at the difference between current assessment and expectations. This difference is currently larger than was seen in 2008 and has stabilised since May, underlining investors’ optimism that the worst might be behind us.

However, even with the worst behind, today’s ZEW index adds to the evidence of a levelling off in the German economy. There is also truck toll mileage data which shows that activities on German highways has returned to more than 90% of the pre-crisis level, without showing any further improvement in recent weeks.

Also, the latest announcements by some German companies to reduce employment over the next couple of years illustrates that the permanent damage from the crisis as well as the accelerated structural changes driven by the crisis will continue to leave their marks on the economy.