German Investor Outlook Improves Most in Two Years Before Vote

German investor sentiment has seen a significant improvement in January 2025, with the ZEW Indicator of Economic Sentiment rising to 10.3 from 15.7 in December. This marks the most substantial improvement in investor outlook in two years, despite the ongoing economic headwinds and structural problems facing the German economy. The Bundesbank projects a slight decline in real GDP of 0.2% in 2024, followed by growth of 0.2% in 2025, which may have contributed to the improved investor sentiment.



The current economic situation gauge also rose slightly, up 2.7 to -90.4, indicating a slight improvement in the immediate economic outlook. This improvement can be attributed to several factors, including easing inflationary pressure, stabilizing economic growth, and an improving labor market outlook.

Easing inflationary pressure: Although inflation remained high, there were signs of easing inflationary pressure. The Bundesbank projected that the inflation rate would initially remain elevated in 2025 at 2.4%, mainly due to services inflation falling only slowly. However, the pressure exerted by unit labor costs was expected to ease, contributing to a slight improvement in investor sentiment.

Stabilizing economic growth: Despite the ongoing economic weakness, the Bundesbank projected a slight decline in real GDP of 0.2% in 2024, followed by growth of 0.2% in 2025. Although these projections were revised downwards compared to the June forecast, they suggested that the German economy was stabilizing, which may have contributed to the improved investor sentiment.

Improving labor market outlook: Although the labor market remained robust, with high employment and relatively low unemployment, the Bundesbank expected employment to drop slightly in 2025 and unemployment to rise further. However, the labor market was not expected to recover until 2026. This outlook, while still challenging, was an improvement compared to the previous expectations, which may have contributed to the slight increase in the current economic situation gauge.



As the German federal election approaches on February 23, 2025, investors are likely to be closely watching the political landscape and its potential impact on the economy. The election's outcome could influence the government's economic policies, affecting the overall economic outlook and growth prospects. Investors may adjust their portfolios based on their expectations of the election's outcome and its potential impact on specific sectors.

In conclusion, the significant improvement in German investor sentiment in January 2025 reflects a more optimistic outlook on the economy, driven by easing inflationary pressure, stabilizing economic growth, and an improving labor market outlook. As the German federal election approaches, investors will be closely monitoring the political landscape and its potential impact on the economy, which could influence their investment decisions.