German companies with optimism for the future (Daily analysis 25.05.2020)

The fall in consumption in Germany exceeds the estimates of economists and may indicate a long recovery path. The continuation of positive market sentiment slightly strengthens the zloty: the EUR/PLN exchange rate is around 4.50.

Consumption fails to meet expectations

The market volatility on the first day of the new week was limited. This is partly the result of the continuation of the relatively good sentiment seen last week, partly the effect of a trade-free day in the UK and the US. In the morning, macro data from Germany were published. The data were not surprising but may give some more indication of the potential path for the economy to return to pre-pandemic conditions.

The Federal Statistical Office (Destatis) reported that Germany's GDP contracted by 2.2% q/q in Q1. This was already the final reading and proved to be in line with both expectations and preliminary data. However, a more detailed report published together with the final data highlights how strongly private consumption has changed. It fell by 3.2% in the Q1, markedly more than the expected 2.0%. By comparison, in 2019, which was very weak for Germany, the change in private consumption was between 0 and 0.9 quarter-on-quarter.

A stronger-than-expected decline in consumption may predict a slightly longer recovery path for demand, which may result in pressure on the supply side, i.e. enterprises, in the coming months. This could also be reflected in a report published today by the ifo institute, which conducts surveys of the sentiment of German companies: they are still pessimistic, but slightly less than expected.

More optimistic about the future

The business climate index rose minimally above expectations in May (79.5 pts. against an expected 78.5 pts.), as well as compared to April (by 5.7 pts.). However, these levels are still far from those before the imposition of the restrictions (96 pts. in February). However, when looking at its components, we see that the entire increase is based on the expectations component, which recorded a strong increase from 69.4 pts. to 80.1 pts. The current assessment of the companies' situation still does not look good, and in fact, it is worse than in April (78.9 pts. vs 79.4 pts.).

The slightly worse evaluation of the current situation is mainly a result of a lower assessment among companies from the industrial and construction sector (there were slight increases in trade and services). In all sectors, however, expectations have clearly increased with the gradual removal of restrictions in April. What remains unclear for the coming months is whether these expectations will meet the corresponding increase in demand, and the data so far suggest that this may be problematic.

However, this is an issue that the market does not seem to care about currently. Positive sentiment has continued to be observed during the quotations in the morning. The main market indexes were appreciating (the German DAX at most since the first week of March), and the main currency pairs remained relatively stable (EUR/USD close to 1.09, i.e. Friday's closing level).

Under these conditions, the zloty gained against the basic currencies. Although this was not a fundamental change, for the first time in two months, the EUR/PLN quotations fell below 4.50. The sustained positive sentiment may gradually strengthen the Polish currency. However, we should remember that the conflict between the US and China has little impact on the market at present, but may escalate at any time, ultimately also negatively affecting the zloty.