A Cautious Optimism Amid Trade Disputes: ZEW Economic Expectations for Eurozone and Germany
Enhanced governmental structure and advancements in trade negotiation lead to improved ZEW economic predictions. - Revised Cabinet appointment and advancement in tariff disagreement fuel optimism for economic advancement
Informs ZEW President Achim Wambach, "the formation of the new federal government, progress on trade disputes, and a stabilizing inflation rate" have sparked renewed optimism, despite a plunge in expectations to -14 points in April due to U.S. trade policy. The previously mentioned factors have had a positive impact, reversing some of the downturn.
There was a slight dip in the assessment of the current situation, with a 0.8% drop to -82 points. Notably, Germany's value remains the lowest in the Eurozone. However, expectations for sectors such as banking, automotive, and chemicals have noticeably improved. The interest rate cuts by the European Central Bank (ECB) have also improved the outlook in the construction sector, as reduced interest rates enhance financing conditions.
Looking ahead, expectations for the economic development in the Eurozone have improved significantly, rising by 30.1 points to 11.6. The assessment of the current situation saw an increase of 8.5 points.
A panel of 191 analysts and institutional investors participated in the survey conducted from May 5 to 12.
Background:
The current economic climate for the Eurozone and Germany hints at a moderate growth outlook, clouded by recent government developments and ongoing trade uncertainties.
Assessing Eurozone Economic Expectations:
- Projected Economic Growth: The Eurozone GDP grew by 0.4% in the initial quarter of 2025 compared to the preceding quarter. However, economic research institutions have revised growth forecasts downward for the year, with organizations such as J.P. Morgan Research anticipating growth of around 0.9%.
- Primary Growth Influencers: The Eurozone's growth is affected by higher U.S. tariffs and prolonged trade policy uncertainties, despite a respite from tariffs and EU retaliation measures for 90 days. Trading tensions, primarily with the U.S., and China's exclusion from the tariff pause exacerbate the situation. Tighter financial conditions, elevated uncertainty, and downside risks further weaken economic activity in 2025, with potential rebounds expected in 2026 and beyond, thanks to fiscal reforms and easing energy prices.
Germany's Economic Outlook:
- Effect of Governmental Changes and Fiscal Policy: The new federal government's fiscal policy reforms in Germany have had a positive impact on the regional economy, offering some support to the Eurozone in a manner that falls short of completely offsetting trade-related risks.
- Potential Perils: The manufacturing sector in Germany, along with Central and Eastern European countries, are exposed to trade shocks, translating to more pronounced downgrades in growth expectations for these economies. As Germany's economy is export-oriented, ongoing trade disputes and tariff uncertainties tend to weigh heavily on its growth prospects.
Summing It Up:
The Eurozone is forecasted to expand by around 0.8-0.9% in 2025, with a slight increase to about 1.2% in 2026, following significant downgrades largely driven by trade tensions and tighter financial conditions. Germany benefits from fiscal reforms under its new federal government, providing some economic support, but remains vulnerable to trade dispute fallout. Trade uncertainties, particularly from sustained U.S. tariffs and heightened geopolitical risks, remain the main downside factors clouding the near-term economic outlook for both the Eurozone and Germany.
This suggests a mix of cautious optimism and substantial risks, underscoring the significance of stable trade relations and effective fiscal policy in the pursuit of growth.
- The improving expectations for economic development in the Eurozone can be partly attributed to the positive impact of the interest rate cuts by the European Central Bank (ECB), as reduced interest rates enhance financing conditions in the business sector, particularly in sectors such as banking, automotive, and chemicals.
- Despite the renewed optimism in the Eurozone, ongoing trade uncertainties, especially from sustained U.S. tariffs and heightened geopolitical risks, remain the main downside factors clouding the near-term economic outlook for both the Eurozone and Germany. This suggests that stable trade relations and effective fiscal policy are crucial for growth and business finance in EC countries.
