German ZEW index improves in January but current situation gauge tumbles

German economic sentiment unexpectedly improved in January, according to the latest survey from the ZEW Center for European Economic Research in Mannheim, but the indicator for the current situation plunged.

The headline ZEW investor expectations index rose to -15.0 this month from -17.0 in December, beating expectations for a reading of -18.5.

However, the current situation index tumbled to 27.6 from 45.3 in December, massively undershooting expectations for a reading of 43.

Achim Wambach, President of ZEW, said: "It is remarkable that the ZEW economic sentiment for Germany has not deteriorated further given the large number of global economic risks. The financial market experts have already considerably lowered their expectations for economic growth in the past few months.

"New, potentially negative factors such as the rejection of the Brexit deal by the British House of Commons and the relatively weak growth in China in the last quarter of 2018 have thus already been anticipated."

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said the headlines are somewhat confusing.

"We tend to focus on the expectations index, which sent a slightly more upbeat signal for the start of 2019, consistent with the rebound in German and eurozone equities at the start of the year.

"That said, it remains depressed without any discernible sign of a rebound, and the crash in the current situation index looks horrible. We are inclined to think that it mainly reflects the fact that growth likely remained weaker than expected in Q4, and that equity earnings growth is now falling. Overall, a relative rise in expectations is a bullish signal from this survey, but on this occasion it is being driven almost exclusively by a plunge in the current situation index. We need more evidence to ascertain whether expectations are turning up in earnest."

Oxford Economics said: "With Germany seeming to have avoided a technical recession in H2 2018, the improved ZEW reading bodes well for a stronger recovery going forward, even though the sharp decline in the current situation index still casts doubt about the immediate outlook in the German economy."