By: Dr. Mike Campbell

Germany is the powerhouse economy of Europe, so business sentiment there is an important barometer of the fortunes of the wider EU. The ZEW economic sentiment index is a closely watched measure of investor confidence. It has a long-term average value of 24.5, but recently has been very much lower. The current reading of minus 21.6 points is a substantial improvement on the previous value of minus 53.8 points. It the best level of investor confidence seen since last July. The English translation of the abbreviation ZEW is the Centre for European Economic Research.

Speaking of the latest survey, ZEW president Professor Wolfgang Franz stated: "Contrary to repeatedly expressed fears of a recession the assessment of the financial market experts gives reason for cautious optimism that Germany will only experience a dent in economic activity. The generous supply of liquidity by the ECB and the relatively affordable refinancing terms for Italy and Spain may have supported the improvement of this month’s sentiment. Nonetheless, the further development of the debt crisis remains a risk to economic growth."

The centre interprets the latest data as indicating that German economic activity will stabilise within the next six months rather than deteriorate further as had been widely expected by economic pundits. They attribute the improvement partially to better US economic data lately and the dropping of the yields demanded for Italian and Spanish bonds.

The data came as a pleasant surprise to analysts. Germany exports 60% of its goods to partners outside of the Eurozone; so the weaker Euro makes these goods cheaper in importing markets


Inflation within the Eurozone has also eased according to the latest data. The rate of inflation within the 17 member bloc eased to 2.7% in December, falling by 0.3% on November’s figure.