German economic expectations drop but current view strengthens

German economic expectations unexpectedly weakened in June but views on the country's economic situation strengthened and beat forecasts.

The ZEW economic sentiment indicator fell 4.6 percentage points from a month earlier to 79.8, missing an average forecast of 86. Investors' assessment of the current economic situation came in at -9.1 compared with -40.1 a month earlier and a consensus forecast of -27.8.

The assessment of the current situation in Europe's biggest economy has recovered to the pre-pandemic level of August 2019 and the outlook is much more positive than then, ZEW said. Inflation expectations rose along with expectations for long-term interest rates.

ZEW's president, Achim Wambach, said: “The economic recovery is progressing. Although the ZEW Indicator of Economic Sentiment has experienced a drop in June, it remains at a very high level.

"The decline in expectations is probably largely due to the considerably better assessment of the economic situation, which is now back at pre-crisis levels. The financial market experts therefore continue to expect a strong economic recovery for the next six months."

Claus Vistesen and Mel Debono of Pantheon Macroeconomics said the survey showed investors had "priced in" good news after May's reading hit a near-20 year high.

"Expectations won’t collapse if, as we expect, prospects for the global recovery remain in tact," the economists said. "The current conditions index likely will continue to improve in line with easing of restrictions continues uninterrupted vaccine distribution. The biggest risk to this outlook is the emergence of new virus variants resistant to the current vaccines."

Sentiment about the economic development of the eurozone also weakened, falling 2.7 points to 81.3, ZEW said. The indicator for the current economic situation in the eurozone rose 27 points to -24.4 compared to May 2021.