FXStreet (Mumbai) – Germany’s ZEW economic sentiment index released by the ZEW Center for European Economic Research today rose to 10.4 in November, exceeding expectations for a rise to 6.0. The October index had come in at 1.9, lowest level recorded in a year. The index of German economic sentiment rose by 8.5 points. Analysts had expected the economic sentiment index to rise by 4.1 points to 6.0 in November.
The assessment of the current situation in Germany fell by 0.8 points to 54.4 points. The Current Conditions Index inched down to 54.4 in November from 55.2 in October, worse than expectations for a reading of 55.0.
ECB president Mario Draghi had hinted at easing monetary policy further. This statement has helped to improve sentiment in the business community. The business community was already enjoying the benefits of weak euro and surge in domestic demand. The additional fund generated from ECB’s asset purchase program has been used to increase lending substantially. Further extension and expansion of quantitative easing as well as further cut in deposit rates would further ease already declining interest rates.
Professor Clemens Fuest from ZEW feels that the robust development of the German economy will be supported by a combination of factors such as the declining external value of euro and the recovery in the U.S. Professor Fuest believes, ‘Economic pessimism appears not to have increased after the terror attacks in Paris.
Eurozone’s economic sentiment index dips raising possibility of further easing
Though the German economic sentiment index rose, the Eurozone’s ZEW economic sentiment index dipped to 28.3 in November from 30.1 in October, missing expectations for an increase to 35.2. The euro zone index hit a 12 month low in November. The assessment of the current situation in the Eurozone rose by 1.2 points to -10.0 points. It thus raises the possibility of extension of the quantitative policy easing by the central bank.
Earlier on 13th November, the mood was lifted by the news of euro zone’s Q3 GDP expansion. This development was however dampened later by the Paris attacks. The Eurostat reported Eurozone GDP expanded by 0.3% in the third quarter. The overall sentiment was lifted by consumers. Fall in unemployment rate and in energy prices increased disposable income boosting consumption. Only by stimulating demand/consumption can the ECB rise above the deflationary pressures that is holding down growth. The development was however offset by the Paris attack which now threatens to impact demand. The attack will discourage travellers from visiting Paris or other major cities in Europe. This decline in tourism in Europe will likely further weaken the euro. The attack rendered a blow to consumer confidence. The ECB is fighting to improve inflation in the region and any event that hits demand spells bad news for the central bank.
Therefore, despite the strong economic sentiment registered by Germany, there is little possibility that the ECB will go back on its intention to ease further. It looks like the ECB has made up its mind to announce new stimulus measures in December to fight deflationary concerns and unemployment.
Also, the Q3 GDP figures reported on Friday is not strong enough to convince the central bank that it has done all it could to promote growth. The central bank can be expected to both extend its stimulus programme to September 2017 and expand it bond buying to EUR 70 billion when it meets in December.
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