It’s not the most reliable leading indicator but the most timely one. Germany’s ZEW index fell to -53.3 in August, from 53.8 in July. The ZEW index is now close to its all-time low seen during the financial crisis. The current assessment also weakened to -47.6, from -45.8 in July, the lowest level since April 2021. The reasons for yet another disappointing data release out of Germany are clear: the almost never-ending long series of risks and challenges for the German economy has become even longer in recent weeks, with two recent additions: low water levels and a gas levy.
Of all the leading indicators, the ZEW index is the least reliable one. It reflects financial analysts’ views, which obviously do not always reflect business or consumer confidence. What the ZEW index has signalled better than other indicators in the past, however, are turning points. With this in mind, today’s ZEW reading does simply not bode well.
More generally speaking, the German economy is quickly approaching a perfect storm. The war in Ukraine has probably marked the end of Germany’s very successful economic business model: importing cheap (Russian) energy and input goods, while exporting high-quality products to the world, benefitting from globalisation. The country is now in the middle of a complete overhaul, accelerating the green transition, restructuring supply chains, and preparing for a less globalised world. And these things come on top of well-known long-standing issues, such as a lack of digitalisation, ageing infrastructure, and an ageing society, to mention a few. In the coming weeks and months, these longer-term changes will be overshadowed by shorter-term problems: high inflation, possible energy supply disruptions, and ongoing supply chain frictions. In recent days, these shorter-term problems have become larger as low water levels and the new gas levy have added to inflation and recession concerns.
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