Falling index ‘no cause for German alarm’

The main indicator for economic sentiment in Germany has dropped for a third month in a row.

The ZEW Index fell by 2.7 points in July to stand at -19.6. Moreover, the ZEW Index for eurozone economic sentiment also fell for July to stand at -22.3 points.

“In the absence of other important macro data for the eurozone and Germany this week, the ZEW Index could get more market attention than normal,” said Brussels-based ING Bank economist Carsten Brzeski.

“It will clearly add to growing concerns about the strengths of the German economy. However, throughout the financial crisis, the ZEW Index has rather been a euro crisis thermometer than a good leading indicator for German growth.

“Looking at the German economy, available monthly hard data so far look[s]... better than the latest drop of confidence indicators might suggest. Industrial production and private consumption have been rather stable in the first two months of the quarter and the export engine is still running smoothly. The economy has not yet escaped the risk of a contraction in the second quarter, but a severe deterioration, as in most other eurozone countries, should be avoided.”

The ZEW Index chimes with the IMF global outlook released on Monday, which showed risks to global growth were on the downside. The main cause of concern is the ongoing financial crisis in the eurozone. However, Irish bond yields continue to narrow against the benchmark 10-year German Bund. Spreads on 10-year Irish bonds were 506 basis points yesterday, compared with 560 basis points before the EU summit on Jun 28.

Ireland’s ability to get back on the sovereign debt market hinges on the outcome of efforts to solve the eurozone crisis.

In the short term, the markets will look at the EU’s memorandum of understanding for the bailout of the Spanish banking system, which will be released on Friday. Over the medium term, leader of the euro group of finance ministers, Jean-Claude Juncker, will present proposals on economic, fiscal, political, and economic integration at October’s EU summit.

If the markets feel that both of these initiatives present a credible roadmap, which combines crisis resolution and recovery for the eurozone, then Ireland could decouple further from other struggling periphery countries, said Ulster Bank economist Simon Barry.

“The lesson of the past 14 months is that there is plenty of scope for countries to differentiate themselves if there is a willingness to embrace the reform agenda and if economies can demonstrate an ability to grow.”

The ability to grow in the face of a massive fiscal contraction, the fact there will be a deal on Irish bank debt, exports’ resilience, and the fact that the Government has consistently exceeded the targets imposed by the troika, all improve Ireland’s profile among international investors, he argues.

“The big risk remains Greece,” said Mr Barry. “There is uncertainty about what will happen there. There is growing domestic demands to change the terms of the bailout agreement. But so far there are no signs that it is up for renegotiation.”