Germany: ZEW Current Conditions Improve

• In March German ZEW expectations fell for a sixth month in a row. The indicator however still stands well above its historical average of 27.2.
• Financial sector sentiment is still burdened by concerns about the fiscal sustainability in the region, but good news in January with respect to industrial production probably lifted the assessment of the current economic conditions.
• If fears over the Greek fiscal situation abate, we look for a rebound in ZEW expectations during H1 10. However, the overall fiscal situation in Euroland is a key risk for the recovery (see Research - Euroland: The weakest link, 12 March 2010).
• We take some comfort from the current conditions index, which has moved higher for more than three quarters now, reflecting improved economic activity.
• The ZEW expectations index is still fairly detached from the more important Ifo and PMI movements. The detailed results for ZEW can be viewed here.

Details

ZEW expectations declined to 44.5 in March from 45.1 in January. This is the sixth consecutive decline from a recent peak in September 2009. Overall, financial market analysts still expect the economy to recover slowly from the crisis within the next six months and the indicator is still well above its historical average of 27.2.

The number of analysts expecting improvement advances a little to 54.6% in March from 53.8% in February. The number expecting it to get worse has been stable at around 10% in recent months.

We take some comfort from the ZEW current conditions index, which is still rising. It improved to -51.9 in March from -54.8 in February. This supports our view that the German economy is recovering - something that was also seen in the latest industrial activity data for the start of the year.

Looking at additional indicators we see that expectations for the stock market indices rose somewhat while both short- and long-term interest rate expectations declined. Inflation expectations decreased significantly during March, which corresponds quite well with Euroland inflation data released today. Core inflation thus declined to 0.8% y/y during February 2010, and we expect it to be as low as 0.6% y/y for the full year.

Assessment and expectations

There is no doubt that financial sector sentiment has been negatively affected by concerns about the risk of a Greek default, which could have a dramatic domino effect. However, market participants' perception of Greece has improved in recent weeks as Greece put forward large austerity measures to rein in the budget deficit. The EU welcomed these measures. Consequently Creek country spreads have narrowed significantly and the Greece administration has successfully carried government bond auctions in recent weeks as the EU continues talks to set up a financial lifeline for Greece if needed.

A key risk for the eurozone in 2010 is still that the need for fiscal consolidation will destroy the recovery before final demand gets out of the doldrums. We however take some comfort in latest industrial production data. Overall we are cautiously optimistic that labour markets will stabilise at some point during H1, sending unemployment rates a little lower - something that could push ZEW expectations upwards again.

Danske Bank
http://www.danskebank.com/danskeresearch

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