German economic sentiment rallies to pre-war levels on government spending plans

LONDON (ICIS)–Business sentiment in Germany jumped this month to the highest level since the onset of the Russia-Ukraine war, driven by expectations of higher government spending and the recent interest rate cut from the European Central Bank (ECB).

The metric of German business sentiment compiled by the ZEW economic institute surged 25.6 points to 51.6 points in March, the highest single monthly increase since January 2023 and the strongest reading since February 2022.

Source: ZEW

Russia invaded Ukraine at the end of that month, resulting in years of political uncertainty and higher energy costs for European industry.

The sharp uptick follows recent elections in Germany that will likely result in the formation of a centrist coalition government and expectations of a drastic increase in spending on infrastructure and defense.

Incoming Chancellor Friedrich Merz is expected to convene an emergency vote on Tuesday to push new spending plans which are expected to ease long-standing debt controls and deliver new investment.

As a proportion of annual GDP, spending is expected to exceed that seen during the post-World War II Marshall Plan and German reunification in the early 1990s, according to economic consultants TS Lombard.

The emergency vote is being conducted with the outgoing German government, as a strong showing for the far-left Die Linke and far-right Alternative for Germany (AfD) in this year’s elections could complicate a vote requiring near-unanimity.

Two-thirds of outgoing German ministers need to back the bill for it to pass.

European markets rallied on Tuesday in anticipation of the spending approval, with Germany’s DAX up 1.06% compared to Mondays close as of 12:04 GMT.

“The brighter mood is likely due to positive signals regarding the future German fiscal policy, for example the agreement on the multi-billion-euro financial package for the federal budget,” said ZEW president Achim Wambach.

“In particular, prospects for metal and steel manufacturers as well as the mechanical engineering sector have improved,” he added.

The ECB’s move to cut interest rates earlier this month despite higher input cost inflation and the potential for retaliatory EU-US tariffs from next month was also a factor in firmer business prospects, Wambach added.

The ZEW sentiment indicator is based on a survey of 350 analysts from the banking, insurance and industrial sectors.

Thumbnail photo: The seat of German parliament in Berlin German (Source: Shutterstock)