German investor morale rose significantly in July, with the ZEW economic expectations index climbing to 26.3 points from 10.5 points in June, exceeding analyst predictions of 17.5 points. This positive shift is largely attributed to a new reform package outlined by Chancellor Friedrich Merz, aiming to boost growth, jobs, and competitiveness. The assessment of the current economic situation also improved, though remaining negative, rising to minus 77.6 points from minus 81.0 points in June.
Despite the improved sentiment, concerns about the Iran conflict and fluctuating oil prices continue to pose risks to Germany's economic recovery. ZEW President Achim Wambach noted that while reforms are having an effect, especially in export-oriented sectors and domestic demand, these external factors remain crucial. The survey, conducted from July 13 to July 21, likely underrepresents the full impact of recent Middle East developments.
Economists have offered mixed reactions. Thomas Gitzel, chief economist at VP Bank, believes the German economy has "turned the corner," pointing to increases in retail sales, industrial orders, and industrial production in May, potentially leading to slight GDP growth in the second quarter. However, Alexander Krueger, chief economist at Bethmann Hal, cautioned that the sustained improvement in economic expectations depends on political developments related to the U.S. President and Iran.
Separately, the ifo Business Climate Index also edged up slightly to 88.6 in July from 88.4 in June, marking its seventh consecutive monthly improvement. While companies expressed more satisfaction with current conditions, their future expectations remained subdued. The German government also launched a $739 billion investment plan to revive the economy through 2028.
However, this business sentiment survey also highlighted external threats, with over 60 percent of surveyed manufacturers reporting negative impacts from impending U.S. tariffs, set to take effect on August 1. Approximately 30 percent of companies have postponed U.S. expansion plans, and 15 percent have canceled them. Carsten Brzeski of ING Research warned that trade tensions, a stronger euro, and U.S. tariffs could still weigh on Germany's export-driven economy.
