Will Germany catch up with the rest of the eurozone?

Euro Macro: Sentiment in Germany jumps higher after a dire ending to 2021

Germany’s ZEW expectations index jumped higher in January, rising to 51.7, up from 29.9 in December. The index gauges the expectations of economists and financial analysts about Germany’s economic conditions during the next six months (‘improve’ minus ‘get worse’). The other part of the ZEW survey is the current conditions index (‘good’ minus ‘bad’). This fell in January (to -10.2, down from -7.4 in December). The phrasing of the questions in the survey implies that low current conditions tend to go hand in hand with rising expectations. Still, the combination of the two parts of the survey currently is consistent with robust growth in Germany’s economy, at a rate well above trend during the next few quarters. Having said that, activity in the first months of 2022 will probably still be depressed by supply chain problems in global industry and Omicron-related containment measures in services. We expect that the impact of these two impediments to German growth will ease after the first quarter of this year. As a result, we see the German economy rebounding sharply during 2022 Q2-Q4, outperforming the eurozone aggregate.

A first indication for the damage of the ongoing supply side bottlenecks in global trade and the spread of Omicron in the final months of 2021 was given by Germany’s statistical office at the end of last week. It published the first estimate for GDP growth during the year 2021 as a whole, which came in at 2.7%, following a 4.9% contraction during 2020. According to reports in the press, an official of the statistical office mentioned that GDP contracted by between 0.5% and 1.0% qoq in 2021Q4. Such a contraction would be below our own and the consensus expectations. However, it seems that previous quarters will be revised higher as the combination of the annual average growth during the year and the first estimate for the contraction in Q4 implies that growth during 2021 Q1-Q3 was higher than published before. In any case, the level of Germany’s GDP was probably roughly 1.5% below its pre-pandemic level in 2021Q4, a much wider gap than that for the eurozone as a whole of around -0.25% (i.e. the eurozone excluding Germany will be slightly positive). We expect the gap between Germany and the eurozone to narrow during the course of this year and the next.