Economic sentiment in Germany surged in February, with the ZEW Indicator of Economic Sentiment climbing 15.7 points to 26.0, its highest level since July 2024. The sharp increase reflects growing optimism surrounding European Central Bank (ECB) rate cuts, potential fiscal stimulus, and an improved outlook for the construction sector.
The jump in sentiment, which exceeded market expectations of 20, marks the strongest monthly increase in two years. The improvement comes just days before Germany’s federal elections, with investors hopeful that a new government will implement policies to revive growth in Europe’s largest economy.
Economic Recovery Hopes Grow
The ECB’s recent rate cut of 25 basis points to 2.75% has fueled expectations of further monetary easing, while speculation around government stimulus measures has bolstered confidence in economic recovery.
“Shortly before the federal election, economic expectations have clearly improved,” said ZEW President Achim Wambach, PhD. “This rising optimism is probably due to hopes for a new German government capable of action.”
Wambach also noted that private consumption is expected to strengthen in the next six months, while lower borrowing costs could revive the struggling construction sector.
However, despite the improved outlook, the current economic situation remains weak. The ZEW Indicator for the present state of the economy edged up slightly by 1.9 points to -88.5, indicating that challenges persist.
Eurozone Sentiment Also Improves
Optimism was not limited to Germany. The ZEW Economic Sentiment Indicator for the Eurozone increased by 6.2 points to 24.2, while the assessment of the bloc’s current economic situation rose by 8.5 points to -45.3.
The improvement in investor confidence comes as inflation expectations shift downward. A Bank of America survey found that 59% of fund managers expect lower inflation in Europe in the coming months, a significant jump from previous expectations.
Investors Turn Bullish on European Markets
Investor sentiment toward European equities has also turned increasingly positive. The Bank of America’s February fund manager survey revealed that 45% of investors now expect stronger growth in the next 12 months, a sharp increase from just 9% in January.
Confidence in German fiscal stimulus and further ECB rate cuts are seen as the primary drivers of this optimism. As a result, European stocks are now expected to be the best-performing global equity market in 2025, with 12% of investors overweight on European equities—a dramatic turnaround from December, when 25% were underweight.
Markets React Amid Geopolitical Uncertainty
Despite the positive economic data, markets remained muted as geopolitical concerns took center stage. The DAX index briefly touched a record high of 22,851 points before settling at 22,750 points.
European leaders met in Paris to discuss Ukraine and defense spending, but no major policy announcements were made. Meanwhile, U.S. and Russian officials were set to meet in Saudi Arabia for conflict resolution talks, further influencing market sentiment.
The euro edged 0.2% lower to 1.0460 against the U.S. dollar, while the Euro STOXX 50 dipped 0.1%. Notable market movers included ING (+1.4%) and Société Générale (+1.3%), while Kering (-1.8%) and Carrefour (-1.5%) were among the biggest losers.
As Germany heads into its federal elections, economic and political uncertainties remain, but February’s sharp rise in sentiment signals a potential turning point for the country’s economic recovery.
