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German investor confidence slips in May: ZEW

Analysts and investors turned gloomier in May about prospects for the German economy, the biggest in Europe, because of rising prices and rise of the euro, the ZEW institute's monthly indicator showed on Tuesday.

Published: 20 May 2008 12:58 CEST

German investor confidence slips in May: ZEW

Traders on the stock exchange floor in Frankfurt. Photo: DPA

The institute’s closely watched indicator of economic sentiment fell by 0.7 points and now stands at minus 41.4 points after minus 40.7 points in the previous month.

Economists polled by Thomson Financial had expected an improvement to minus 38.0 points.

“On the one hand, economic expectations for the next six months for the United States and consequently also for the German export industry have increased considerably. On the other hand, inflationary risks remain high. This should negatively affect private consumption in Germany,” the ZEW said.

“German firms were very successful in the first quarter of 2008. However, the economic momentum should gradually lose speed because of increasing refinancing costs and a strong euro. This should have a negative impact on firms,” ZEW president Wolfgang Franz said in a statement.

A separate indicator showing how the 300 analysts and institutional investors polled each month assess the current economic situation in Germany rose 5.4 points to 38.6 points.

Data since the beginning of the year have suggested that the German economy was holding up surprisingly well despite the strength of the euro, rising energy and food prices, the credit crunch and a slowing of the US economy.

The economy grew 1.5 percent in the first three months of the year, data last week showed last week, for example, well ahead of market expectations, with industrial output rising 2.3 percent.

But Tuesday’s ZEW indicator adds to growing evidence that Germany cannot escape these global headwinds for much longer, and both the government and economists expect weaker conditions as the year progresses.

Jennifer McKeown at Capital Economics said that the fall was a “disappointment” that suggested concerns over the potential impact of the credit crunch and strong euro on the wider economy were mounting.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year.

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’, Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn.

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment?

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024 about 1 percent below the estimated structural level.

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending?

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”. The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”.

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025.

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023.

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write.

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers.

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.”

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