German investor morale improves, rate cut hopes have ‘doping effect’, ZEW says

By Thomson Reuters Feb 13, 2024 | 5:03 AM

BERLIN (Reuters) – German investor morale improved more than expected in February on hopes of interest rate cuts, despite a dire assessment of current conditions, the ZEW economic research institute said on Tuesday.

The institute reported a rise in its economic sentiment index to 19.9 points from 15.2 points in January.

The February increase, the seventh in a row, beat expectations of analysts polled by Reuters of a reading of 17.5.

According to ZEW president Achim Wambach, over two-thirds of respondents expect the European Central Bank to make interest rate cuts in the coming six months, and nearly three-quarters are anticipating imminent rate cuts by the U.S. central bank.

“Looming interest rate cuts seem to have a doping effect” on investors, said Hauck Aufhaeuser Lampe private bank chief economist Alexander Krueger.

Financial markets, however, have been scaling back their bets on rate cuts from the biggest central banks in recent weeks as inflationary pressures linger and U.S. economic data remains mostly strong.

Despite the pick-up in German investor confidence, the assessment of the economic situation indicated that “the German economy is in a bad place,” said Wambach.

That assessment fell more than expected, to -81.7 points in February from -77.3 points the month before.

Analysts had expected a reading of -79.0 points. According to Wambach, it was the lowest reading since June 2020.

Economists disagreed on what the reading foretold: Krueger said that the dip was an indication that Europe’s largest economy was on course for a recession, while VP Bank chief economist Thomas Gitzel said that the assessment, while still relatively low, no longer signals that one is on the way.

“Ultimately, the level of interest rates is not the cause of the economic malaise, but difficult business conditions. Lowering key interest rates will not stop companies’ plans to relocate,” said Krueger.

The German economy contracted by 0.3% in 2023, due to persistent inflation, high energy prices and weak foreign demand, the federal statistics office said last month.

(Reporting by Miranda Murray and Bartosz Dabrowski, Editing by Rachel More and Kim Coghill)