(Bloomberg) -- Germany’s investor outlook improved for a seventh month and by more than anticipated — offering hope that the worst may be over for Europe’s biggest economy as cooling inflation clears a path for interest rates to be reduced.
An expectations index by the ZEW institute rose to 19.9 in February from 15.2 in January – exceeding the 17.3 median estimate of economists in a Bloomberg survey. The result came even as a measure of current conditions decreased to its lowest since mid-2020.
“Economic expectations for Germany have improved again,” ZEW President Achim Wambach said in a statement. “More than two-thirds of the respondents expect the European Central Bank to make rate cuts over the next six months in light of falling inflation rates.”
A similar share sees borrowing costs being reduced imminently in the US, too, he added.
Germany was the only Group of Seven economy to shrink last year due to a downturn in its key manufacturing sector, weaker foreign demand and the fallout from the inflation shock. A rising number of analysts — including those at Deutsche Bank and Commerzbank — predict another contraction in 2024.
With looser monetary policy coming into view, however, some remain optimistic.
Wolfgang Schmidt, a close aide to Chancellor Olaf Scholz, said the first signs are emerging of a consumer-led rebound, with further tailwinds to come from initiatives on the national and regional level to slash red tape.
“We don’t have a recession,” he told an event Tuesday organized by a local Berlin business lobby group. “We’re not seeing anything that normally accompanies a recession — such as unemployment. The labor market is very stable, real wages are rising again. We’ll see growth this year.”
Ralf Umlauf, a senior economist at Helaba, also noted indications that the prospects for Germany’s economy are brightening.
“While the level can still be assessed as low, it’s at least clearly in positive territory,” he said in an emailed report to clients. “All in all, weak economic developments are to be expected at the beginning of the new year and a gradual improvement should only be possible over time.”
Indeed, the start of 2024 hasn’t been promising. Industrial data continue to disappoint — prompting questions about the sector’s future, while turmoil in commercial real estate is threatening some banks and government infighting is hampering reforms.
A separate poll by Bloomberg suggests gross domestic will fail to grow again between January and March, compared with an earlier prediction for an advance of 0.1%. The Bundesbank is even more downbeat, calling stagnation in the first quarter “the best-case scenario.”
Anything short of that would mean a first recession for Germany since the pandemic.
--With assistance from Michael Nienaber and Alexander Weber.
(Updates with economist starting in ninth paragraph.)
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