Tuesday, May 18, 2010

Crisis drop

The German ZEW index dropped in May on the back of recent market turmoil. The ZEW index which measures investors’ confidence now stands at 45.8, from 53 in April; still clearly above its historical average. At the same time, investors have again become more positive on the current economic situation. The current assessment component increased for the twelfth consecutive month to its highest level since September 2008.

Today’s ZEW index illustrates the uncertainty the current sovereign debt crisis and latest market turmoil have created. The harsh winter, volcanic ashes, the Greek crisis, high market volatility and now the country’s most famous ankle, many unexpected events have challenged the robustness of the German recovery. However, up to now, the fundamentals of the Germany economy have rather improved than worsened. First quarter growth was better than initially feared, order books are filling and all leading indicators point to a further growth acceleration in the second quarter.

Looking beyond the summer, the growth momentum should slow down somewhat. Fiscal consolidation will also weigh on the German economy. Tax cuts have now officially been shelved at least until 2012. Additional consolidation efforts are also likely as the German government will want to continue its policy of leading by example. However, there is at least one upshot from the current crisis: the weaker euro. While many observers currently tend to see the euro as a crisis barometer, recent surveys show that many German businesses tend to be more pragmatic. For them, the weaker euro could be a blessing which simply boosts exports.

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