Investing.com – A closely-watched measure of Germany’s economic mood improved to a one-year high in March, but concerns over the health of the euro zone's largest economy lingered after the government's council of economic advisors slashed their growth forecast for this year.
The ZEW Center for Economic Research said that its index of German economic sentiment rose to -3.6 points this month from a reading of -13.4 in February, above analysts' expectations for a rise to -11 points.
But any relief was tempered by comments from Germany's so-called "5 sages", who cut their forecast for German growth this year to only 0.8%, from an estimate of 1.5% in November. They cited temporary problems with key sectors such as chemicals and autos, weak demand from key export markets and capacity constraints at home.
Even so, domestic demand, helped by the construction sector and public-sector spending, is still strong enough to ensure that the country doesn't fall into recession, the council's chairman Christoph Schmidt said in a statement.
The German economy narrowly avoided a recession at the end of last year, as Brexit woes and global trade tensions with the U.S. weighed on it. Business confidence has also lagged, hitting its weakest level in five years in February, according to the Ifo research institute.
ZEW's report, meanwhile, hinted at a bottoming out in the short term.
“The significant increase in the ZEW Indicator of Economic Sentiment shows that major economic risks are considered to be less dramatic than before," ZEW President Achim Wambach said in a press release. "The possible delay in the Brexit process as well as the renewed hope for a deal on the UK’s withdrawal from the EU seem to have given rise to more optimism among financial market experts."
ZEW's Current Conditions Index fell to 11.1 from 15.0, compared to expectations for a reading of 11.7.
An index level above 0.0 notionally indicates optimism, whereas a level below 0.0 indicates pessimism. In reality, the ZEW index is more useful as a gauge of turning points in the economic mood, rather than as a measure of absolute levels.
Germany’s central bank, Deutsche Bundesbank, is concerned that smaller companies are not prepared for the U.K.’s exit from the European Union later this month, the Financial Times reported on Tuesday. Many companies rely on London for derivatives clearing and currency swaps. Shifting such activities to other cities in Europe is a slow process and even if Brexit is postponed, companies aren’t prepared, according to the FT.
Germany's trade with the U.K. amounts to around 120 billion euros ($136 billion) a year, according to the BDI industry association. A recent survey found that nearly a quarter of German companies expect to lay workers off in the event of a no-deal Brexit. BDI President Joachim Lang said in February that a disorderly Brexit could take at least half a percentage point off gross domestic product growth this year.