ZEW's Take: Brighter Economic Skies Ahead?
Increased cabinet changes and progress in the customs debate lead to an elevation of economic expectations, as per ZEW reports. - Fresh Appointments and Customs Squabble Progress Signal Potential Economic Upturn
According to ZEW's President Achim Wambach, the new German government and progress in trade discussions have stirred signs of a more hopeful economic outlook. However, the waters remain murky.
Previously, economic expectations plummeted in April, reaching -14 points, due mainly to US trade policies. But recent events have offered a pinch of positivity.
As for the current situation, the index dipped by 0.8 percent to -82 points, making Germany's outlook the gloomiest in the entire Eurozone.
Optimism is gradually seeping back into the banking sector, while exporter-heavy industries like automotives and chemicals cast a brighter gaze towards the future. The European Central Bank's rate cut has improved the prospects of the construction industry, allowing for improved financing conditions.
The economic expectations for the Eurozone came alive with more vibrancy, rising by 30.1 points to 11.6 points. The assessment of the current situation saw an improvement of 8.5 points, standing at -42.4 points.
In the past week (May 5-12), 191 analysts and institutional investors shared their insights for the survey, explains ZEW.
A Closer Look: What's Shaking in the Economy
The Eurozone economy showed resilience, with a GDP growth of 0.3-0.4% in Q1 2025, marking the fifth consecutive quarter of expansion. Despite the initial estimate reaching 0.4%, a slight downward revision has it now at 0.3%.
Growth across countries varied during this period, with Spain, Lithuania, and Ireland leading the pack, while France and the Netherlands showed modest advances. Germany emerged from a brief recession with a GDP growth of 0.2%.
Whilst the growth is encouraging, caution remains, with forecasts anticipating setbacks owing to the perpetual threats posed by U.S. tariffs and trade policy uncertainties.
Germany's Reluctant Recovery
Germany recorded a 0.2% GDP growth during Q1 2025, following the loose fiscal stance initiated by the new government, which is perceived positively for the nation's growth prospects. Nonetheless, it remains exposed to external shocks, particularly from US tariffs on crucial sectors like automotive and steel.
Sector-Specific Stumbles and Strides
Automotive Sector
US tariffs of 10% and 25% on automobiles, steel, and aluminum pose significant threats to the sector, despite a temporary tariff hiatus. Trade negotiations carry uncertain outcomes, and prolonged tensions could further suppress export and manufacturing investments.
Banking Sector
Although specific data isn't provided, it's plausible that the banking sector adjusts to the moderate growth and policy reforms, maintaining a steady condition. Nevertheless, it's cautious about potential hazards from slowing business investment and trade policy uncertainty-related volatility.
Trade Tussles and Their Tourniquets
Recent trade skirmishes, notably US tariffs on European goods, pose substantial risks. Even though a 90-day tariff reprieve offers transient relief, it doesn't banish underlying uncertainties. Conversely, the US's exclusion of China from the tariff break and intensifying Chinese tariffs continue to complicate the economic outlook. These trade conundrums are predicted to impact exports, investment, and consumption throughout 2025, with the heaviest consequences expected in the latter half of the year.
- The European Central Bank's rate cut has improved the prospects of certain EC countries' industries, particularly the construction industry, by providing better financing conditions for business activities.
- Progress in trade discussions between EC countries and other nations is crucial for sectors heavily reliant on exports, such as the automotive and chemical industries, as uncertainties in trade policy can suppress export and manufacturing investments.
