German ZEW Investor Sentiment Hits 3-Year High In March; Italy, Cyprus Risks Could Weigh On Upcoming Surveys

Germany’s economic confidence unexpectedly improved for the fourth consecutive month in March, a closely watched survey showed Tuesday, topping consensus expectations and hitting its highest level in three years. However, economists pointed out that while March’s small rise left the index at a high level, fears for Italy and Cyprus will likely affect sentiment in the future.

“We doubt that Germany’s recovery will be as strong as the survey now suggests,” said Jennifer McKeown, an economist at Capital Economics, in a note to clients.

The headline ZEW index, which measures investors’ expectations for the German economy in six months’ time, rose from 48.2 to 48.5. That’s the highest since April 2010, when German gross domestic product was growing at annual rates of around 5 percent. Economists polled by Bloomberg had called for a small fall to 48.1.

"After three substantial increases between December 2012 and February 2013, the indicator has stabilized in March at a respectable level," said ZEW President Clemens Fuest, in a statement.

"The political situation in Italy and the rescue package for Cyprus have increased the risk that the euro zone debt crisis will worsen again. This may have contributed to the fact that the indicator has not increased substantially this month," he said.

The current conditions index rose further too, pushing it back up to the level reached last autumn and adding to evidence that the economy is beginning to recover from the 0.6 percent GDP contraction seen in the final three months of last year.

But McKeown noted that the ZEW has never been a very reliable predictor of GDP growth. March’s increase in the headline index was the smallest since the last fall in November, suggesting that the Italian political stalemate and the slightly softer tone of recent German hard data are having an effect.

Also, most responses will have been taken before the flare-up of the crisis in Cyprus, which could damage sentiment regarding the financial system and economy of the euro zone as a whole.

“We suspect that sentiment will weaken in the coming months and, while Germany should continue to easily outperform the rest of the euro zone, a strong recovery seems like too much to hope for given falling demand from its main trading partners,” McKeown said.