German ZEW Economic Sentiment drops sharply – Falling expectations to blame

A survey of German economic sentiment has dropped sharply in September. Seen as a lead indicator for growth, the ZEW Economic Sentiment gauge has fallen to 26.5 (from 40.4 in August). This is a 17 month low and was a more considerable decline than the market had been expecting (consensus was 30.0).

Whilst current conditions increased marginally to 31.9 (from 29.3 in August) once more this was less than expected (consensus 34.0).

The concern is that whilst German sentiment is positive at the moment, future expectations are weighing and the post-pandemic re-opening fervour may not be lasting. Perhaps there is some election uncertainty to factor in here too.

German ZEW

Other data – Eurozone Q2 GDP (Revised) 

Looking backwards to Q2 there has been a decent upward revision to Q2 growth in the Eurozone. Q2 GDP had been expected to be unrevised at +2.0% however, at the third reading there was an upward revision to +2.2%.


This now means Eurozone GDP is now just -2.5% below its pre-pandemic levels. Subsequently, another strong performance in the current quarter might mean the Eurozone is returning to pre-pandemic growth levels in Q3. However, looking at the rapid fall away of the German ZEW, it is something to remain a little cautious of.


Initial Market Reaction

EUR has initially picked up off this batch of data, but traction will likely be limited. Furthermore, the 10 year German Bund yield has also slipped marginally (by -0.5 of a basis point).

The improvement in backwards-looking GDP is positive, but the forward-looking nature of the ZEW suggests a degree of caution over how Germany, Europe’s growth engine room, may perform in the months ahead.