German investors turn positive as recession fears wane


German investor sentiment turned positive for the first time since Russia’s invasion of Ukraine in January, in a further sign that the downturn in Europe’s biggest economy may not be as sharp as feared.

The ZEW Institute’s indicator of investors’ expectations of the outlook for the coming six months, a closely watched measure of economic confidence, rose for the fourth successive month to 16.9, from minus 23.3 in December. The reading was well above the minus 15 forecast in a Reuters poll of economists.

“The more favourable situation on the energy markets and the federal government’s energy price brakes have contributed to [the improved reading],” said Achim Wambach, president of the Mannheim-based research institute.

The positive figure comes after the German federal statistics office last week reported that the country’s economy expanded 1.9 per cent last year. The office expects stagnation in the fourth quarter, against previous analyst expectations of a contraction.

A surge in gas prices following Russia’s invasion of Ukraine in late February led to fears of a sharp downturn in Germany’s energy-intensive manufacturing sector. However, energy prices have fallen sharply in recent weeks to levels last seen before the outbreak of war. Extensive government support for businesses and households has also helped soften the impact of the energy crisis.

Those fiscal support measures, combined with the lifting of Covid-19 restrictions in China, fuelled a boost in consumption that offset the economic blow of the war in Ukraine, according to the ZEW Institute.

Wambach said Germany’s export opportunities had also improved on the back of China’s easing of pandemic-related restrictions.

The 40.2-point leap in investor morale follows a recent slowdown in the rate of German inflation. Harmonised consumer prices rose by 9.6 per cent in the year to December 2022, versus the 11.3 per cent figure recorded for the previous month, according to finalised inflation data published on Tuesday by the German federal statistics office. 

The inflation figures, however, reflected a drop in gas and fuel inflation resulting from government subsidies and falling oil prices. The core inflation rate — which strips out changes in the prices of food and energy, and is seen as a better measure of underlying price pressures — stood at 5.2 per cent in December 2022, an increase on the 5 per cent in November.

The rise in the core rate makes it likely that the European Central Bank will raise interest rates by another half a percentage point in early February.

“With underlying price pressures still rising, tight monetary policy will become an increasing drag on the economy this year”, said Franziska Palmas, senior Europe economist at Capital Economics. 

After more than a decade of aggressive easing, the ECB increased borrowing costs by 2.5 percentage points in 2022 to combat record-high inflation in the eurozone, ending the year with the fourth successive rise of its benchmark deposit rate, which now stands at 2 per cent. The ECB is expected to raise rates on multiple occasions during the first half of this year, before pausing during the summer.

The ZEW indicator measuring current conditions remained negative in January, although it improved slightly, rising to minus 58.6 from minus 61.4 in the previous month.



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