(Bloomberg) -- Investor confidence in Germany’s economy improved for the first time in four months on the prospect that borrowing costs will fall more quickly than previously anticipated.
An expectations index by the ZEW institute rose to 13.1 in October from 3.6 the previous month. Economists had expected an increase to 10. A measure of current conditions unexpectedly worsened.
Factors boosting optimism include “the expectation of stable inflation rates and the associated prospect of further interest-rate cuts by the European Central Bank,” ZEW President Achim Wambach said Tuesday in a statement. “Positive signals are also coming from Germany’s export markets.”
German officials, as well as a rising number of economists, expect gross domestic product to drop this year as foreign demand remains weak and consumers respond to higher incomes by saving instead of spending.
The country’s flagship car industry looks particularly vulnerable after all major manufacturers — Volkswagen AG, Mercedes-Benz Group AG and BMW AG — warned about their profits in recent weeks.
The export situation may be starting to improve, however, according to Wambach.
“Economic expectations for the euro zone, the US, and China have also significantly improved,” he said. “The increased optimism for China is likely linked to the Chinese government’s economic stimulus measures.”
Analysts polled by Bloomberg say Germany may have already experienced a mild recession, with a 0.1% contraction in the third quarter following a drop of the same magnitude in the preceding three months. An official estimate from the statistics office isn’t due until the end of October.
The ECB is poised to deliver a tailwind this week by cutting interest rates for the third time this year. Officials are now expected to follow up on that with more rapid easing after a string of reports showed the region’s economy to be performing worse than predicted.
Euro-area inflation, meanwhile, fell below the 2% target for the first time since 2021 last month, though policymakers have said it may accelerate again toward the end of the year because of volatile energy costs.
--With assistance from Joel Rinneby and Kristian Siedenburg.
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