July ZEW sends mixed message

No further guidance. Today’s ZEW index has something for everyone. The ZEW index which measures investors’ confidence dropped unexpectedly to 36.3 in July, from 38.5 in June. At the same time, however, investors have become more positive on the current economic situation. The current assessment component increased to 10.6, from 8.6 in June. The first increase after three consecutive drops.

Today’s ZEW index fits into the current picture that the German economy looks like a grab bag, which has something for everyone. It has something for everyone. For the optimists, there is the strong labour market, solid private consumption, strong construction growth and confidence indicators at high levels. At the same time, however, there are dropping new orders, disappointing exports and the continuing euro crisis for the pessimists.

Admittedly, new dark clouds have started to black out growth prospects of the German economy. These clouds are not coming from the South but from the East. The stuttering and now slowing Chinese economy is a clear cause of concern. could become a new risk factor for the German economic outlook. China has become the fifth most important market for German exporters, accounting for roughly 6% of total exports. Obviously, a Chinese hard landing would not leave the German economy unharmed. In the short run, however, the stronger-than-expected recovery in the US and the UK should at least partly cushion a negative Chinese impact. Particularly the US could come to the German rescue. Over the last three years, the US has returned as Germany’s second most important trading partner.

Today’s ZEW index had something for both pessimists and optimist. The truth is probably somewhere in the middle: the German economy remains solid but we will have to get used to annual growth rates of around 1% and not 3%. With such growth rates, it won’t be the economy which decides the September elections but other issues. The latest spying affair and increasing domestic political pressure on the government could be a bigger game changer in the coming weeks. It is almost an irony of fate that exactly in this situation Germany seems to need the US economy more than ever.