Financial analysts became much more upbeat about Germany’s economic prospects this month as the country’s lawmakers closed in on an agreement to raise spending on defense and infrastructure.
The ZEW Indicator of Economic Sentiment, a monthly gauge that tracks the expectations of analysts at around 150 banks, insurance companies and other businesses, jumped 25.6 points on month to 51.6 in March, reaching its highest level since February 2022, ahead of Russia’s full-scale invasion of Ukraine. It also beat a consensus of 45.0 from economists polled by The Wall Street Journal, and was the largest monthly increase since January 2023.
The survey is one the first to gauge the response of businesses to a recasting of Germany’s economic policies by politicians in response to the threat of higher tariffs on its exports to the U.S. and fresh doubts about the reliability of the U.S. as an ally in a future conflict with Russia. The survey was conducted between March 10 and March 17.
After the sentiment reading was released on Tuesday, German lawmakers in the Bundestag, the lower house of parliament, approved plans to unlock hundreds of billions of euros in spending on defense and infrastructure. The plans were put forward by chancellor-in-waiting Friedrich Merz , with his center-right CDU and the center-left SPD agreeing to the deal along with the Green Party.
Previous German governments were much more reluctant to borrow, leaving the economy dependent on exports for growth and hampered by outdated transport and digital systems.
The German parliament’s upper house, the Bundesrat, will vote on the bill on Friday before President Frank-Walter Steinmeier signs it into law.
Positive signals regarding Germany’s future fiscal policy, alongside a European Central Bank interest-rate cut earlier this month, are offering more favorable financing conditions for private households and companies, ZEW President Achim Wambach said. The ECB lowered borrowing costs for the fifth meeting in a row earlier this month.
Despite the rebound in confidence as the next government outlines its ambitious plans, Germany’s economy may weaken further before it begins to recover. Economists warn that much of the increase in defense spending may initially be directed to imports as domestic producers expand their capacity, while infrastructure projects can take years to initiate, let alone complete.
In the meantime, the Trump administration has implemented 25% tariffs on all steel and aluminum imports, with a further increase in duties on imports from the European Union likely to be announced at the start of April.
Those tariffs come at a time when Germany’s factory output remains well below pre-pandemic levels, having been hit hard by a jump in energy costs following Russia’s full-scale invasion of Ukraine in early 2022. The U.S. was Germany’s top export market last year.
Bundesbank President Joachim Nagel said last week that higher U.S. tariffs could push the economy into a recession.
The Ifo Institute, which also produces a widely watched gauge of business sentiment, on Monday cut its forecast for the country’s economic growth this year to 0.2%, from the 0.4% it expected in December, on weak consumer sentiment and firms holding back investment. Germany’s gross domestic product contracted for the second year in a row in 2024.
“Hope springs eternal in the eurozone’s largest economy,” said Claus Vistesen , chief eurozone economist at Pantheon Macroeconomics.
“Current conditions remain dire, consistent with weak growth at the start of the year, but the jump in expectations suggests that investors and market analysts are looking past near-term trade uncertainty and toward the boost from fiscal stimulus,” he said in a note to clients after the publication of the ZEW survey.
However, some economists predict Germany could see a revival in households’ spending this year, with incomes rising faster than inflation, and as the ECB’s interest-rate cuts are felt more strongly by consumers.
Write to Ed Frankl at edward.frankl@wsj.com
