German Economic Sentiment Improves Sharply: ZEW

Germany’s economic sentiment improved strongly in November to its highest level in five months on hopes that inflation is set to ease in the coming months, results of a closely-watched survey showed Tuesday, though the overall outlook for the biggest euro area economy is bleak.

The indicator of economic sentiment rose 22.5 points to minus 36.7 from minus 59.2 in October, results of the monthly survey by the Mannheim-based research institute ZEW showed.

That was much better than the minus 50.0 economists had predicted. The latest reading was the highest since June, when it was minus 28.0.

The current conditions index of the survey climbed to minus 64.5 points from minus 72.2 in October. Economists had forecast a reading of minus 68.4.

“The economic outlook for Germany has thus improved significantly compared to October, but still remains negative,” ZEW said.

ZEW President Achim Wambach attributed the latest improvement in the economic sentiment most likely to the hope that inflation rates will fall soon.

The ZEW survey showed that inflation expectations for the eurozone declined significantly again in November as the relevant measure shed 16.4 points to reach minus 52.2.

“In this case, policymakers would not have to hit the brakes on monetary policy as hard and/or for as long as feared,” Wambach said.

“However, the economic outlook for the German economy is still clearly negative.”

Consumer price inflation in Germany accelerated for a third month in a row in October to hit a record high of 10.4 percent. Inflation is almost entirely driven by soaring energy prices.

Eurozone inflation also hit a record high of 10.7 percent in October, raising the prospect of further interest rate hikes from the European Central Bank that is trying to balance the risk of recession and the persistently high inflationary pressures.

The German economy unexpectedly expanded in the third quarter, preliminary figures from Destatis showed on October 28.

The economy logged a quarterly growth of 0.3 percent, defying expectations for a contraction of 0.2 percent.

However, recent weak figures for exports and factory orders, due to dull foreign demand, suggest a lackluster quarter for manufacturing at the end of the year as runaway inflation bites into future business plans.

The Bundesbank has assessed that the German economy is probably on the brink of a recession. In the October monthly report, the bank said the economic output could fall significantly overall in the fourth quarter of this year and in the first three months of 2023.

The ZEW survey’s economic sentiment measure for eurozone rose by 21.0 points to minus 38.7 points in November. The current situation index also climbed this month, adding 5.5 points to stand at minus 65.1 points.

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