In a week which will see a key ECB meeting (22nd January) in which it is widely expected that a raft of Eurozone Quantitative Easing measures will be announced, a closely watched economic barometer suggests that German investor confidence has picked up further.
The ZEW (Centre for Economic Research) indicator of economic sentiment has risen for a third consecutive month to stand at 48.4, up from last month’s value of 39.4. The long term average for the index stands at 24.5 points and the current reading is the highest since February of last year. Commenting on the most recent data, ZEW’s President, Professor Clemens Fuest noted: "The new year started with turmoil in the capital markets. News of the upcoming parliamentary elections in Greece and the Swiss National Bank's decision to abandon the euro cap on the franc's value have led to strong stock market fluctuations. However, this seems not to have impressed ZEW's financial market experts with regard to their expectations on the German economy. Instead, decreasing crude oil prices and a depreciating euro have contributed to a further gain of the indicator."
Big day for the ECB
It is widely anticipated that the ECB will embark on its own QE package this week in order to stimulate the economy and ward off deflation. Such a course of action is likely to push the Euro down against other major currencies since the measure means that it is unlikely that the ECB will increase Eurozone interest rates in the foreseeable future. However, the declining value of the Euro and the plummeting oil price could already have provided stimulus to the Eurozone economy and it is known that the Germans have always been reluctant to see the ECB engage in the purchase of member state assets. It is also likely that deflation will increase anyway as cheaper fuel and energy prices filter through. A more critical parameter for the ECB, one assumes, will be the trend in consumer spending. If consumers continue to spend unabated, then the role of price deflation on the economy can only be benign. Unlike the Japanese, many Europeans are all too keen to spend extra money that they may have on consumer goods today, often on credit, rather than save up and buy them at a future date when they may be cheaper.
Furthermore, uncertainty over the direction of Greek politics ahead of next week’s general election is already placing pressure on the Euro. It is anticipated that the election of Syriza, a left-wing party, would set Greece on a collision course with the ECB and IMF which could ultimately lead to Greece leaving the single currency – a situation almost all external experts believe would be catastrophic for Greece, but now have only a modest effect on the remaining members.