The May release of the German ZEW index of investor confidence provided yet again mixed signals. While the current conditions balance improved to 91.5 and thus the highest level seen so far in the cycle, the expectations balance reflecting six-month forward investor sentiment declined for the third consecutive month, down by 4.5 points on the month, reaching 3.1 (consensus 4.0, Barclays Capital: 1.3). While the latter level is still notably above the long-run average and also above our own estimate, it signals that investors have become slightly more concerned about the sustainability of Germany’s growth spurt witnessed throughout 2010 and in the first quarter of this year. The latter reflects the adverse impact of higher energy, food and consumer goods inflation on purchasing power, but probably also the uncertainties related to the ongoing financial problems in euro area periphery countries and the observed slowdown of economic growth in selected emerging market economies, most notably in South-East Asia. The results of the May ZEW are in line with the signals we receive from other surveys such as the Ifo and PMI surveys, which suggest a moderate slowdown in economic momentum going forward, albeit coming from an elevated pace. These results are in line with our expectation for GDP growth in Germany, which we expect to moderate notably in Q2 (to about 0.4% q/q), as the catch-up effects in construction related to the adverse winter weather conditions in Q4 last year and the very favourable weather conditions observed so far this year dissipate. Nevertheless, today’s release of the ZEW suggests that German real GDP growth should remain solid and above-trend over the next 6 months, suggesting that 2011 should be another year of above 3 percent real GDP growth, thus in line with our current projection of 3.4% real GDP growth for 2011 as a whole.
Frank Engels, BARCLAYS CAPITAL – Foreign Exchange Research