Near-term investor expectations about the German economy continue to rise, even as economic data remains lacklustre. The ZEW Institute’s monthly survey, measuring near-term investor sentiment, rose to +19.9, up 4.7 points from January, marking the eighth consecutive rise since July 2023.
The findings signify broader expectations of a rebound for the German economy this year, after its GDP contracted by 0.3% in 2023. However, sentiment around the country’s current situation is deteriorating, indicating that although many investors are anticipating growth in the future, contemporary headwinds persist. For instance, many vital sectors, like manufacturing, still need to shake off the fallout from rising energy costs, following the outbreak of war in Ukraine.
Falling inflation, now at 2.9%, has fuelled hopes that the European Central Bank will cut interest rates in the first half of 2024, which should ease some of the pressures on German businesses. The nation’s finance minister, Christian Lindner, has accepted that there are structural problems to fix, but opposed the claim that Europe’s largest economy is becoming the next “sick man of Europe.” The Organisation for Economic Co-operation and Development (OECD) estimates a return to growth of 0.6% in 2024. Only time will tell whether this projection can be met.
Over the channel, the Office for National Statistics (ONS) reported that UK earnings growth, including bonuses, decelerated to 5.8% in Q4 of 2023, down from a high of 8.5% in the summer. In theory, this should reduce inflationary pressure, although the figure may still be too high for the Bank of England (BoE) to confidently begin cutting interest rates.
Wage growth still exceeds inflation, which has held steady at 4% in January. While this is favourable news for workers, it may prolong the time it takes for inflation to reach the BoE’s 2% target if businesses decide to pass labour costs onto consumers.
Even as firms grapple with larger wage expenditures and 16-year-high interest rates, the job market remains tight, with the unemployment rate standing at a respectable 3.8%. However, part of this can be attributed to a decrease in the employment rate, which has fallen by 1.2% points since February 2020 as more people are unavailable for work because of long-term illness.
Investors are still anticipating the first interest rate reduction to take place by June this year. Although with less certainty than before, estimating the probability of this to be 60%, down from 75% before the data was released.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the investments mentioned. Investments and income arising from them can fall as well as rise in value. The information and views were correct at time of publication but may have changed at point of reading.