• Expectations index by ZEW rises to 26 in February; est. 20
• Economic prospects featuring prominently in election campaign

Investor confidence in Germany’s economy improved by the most in two years, with elections this weekend set to produce a more market-friendly government and interest-rate cuts bolstering demand.

The ZEW institute’s index of expectations rose to 26 in February from 10.3 in January — more than economists had forecast. A measure of current conditions rose, but by less.

German Investor Confidence Jumps

Source: ZEW

“This rising optimism is probably due to hopes for a new German government capable of action,” ZEW President Achim Wambach said Tuesday in a statement. “Also, after a period of absent demand, private consumption can be expected to gain momentum in the next six months.”

The economy has been at the center of Germany’s election campaign, with the likely next chancellor, Friedrich Merz, promising to rekindle growth by reducing taxes, regulation and social handouts. Europe’s biggest economy contracted for a second straight year in 2024 and is expected to tread water in 2025.

Germany’s export-oriented manufacturing sector is chiefly responsible for the malaise, suffering from weak demand in China, high energy costs and geopolitical uncertainty. While a gauge of activity has improved recently, it still signals declining output.

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US President Donald Trump’s decision to stop short, for now, of the full barrage of tariffs that he’s threatened is a welcome reprieve. It’s helped push the country’s benchmark DAX Index to a record, though that may prove temporary.

The prospects of a US-brokered peace deal in Ukraine are adding to timid optimism. Such a scenario could lead to a drop in energy prices and higher defense spending that could boost industry.

But while another reduction in borrowing costs by the European Central Bank is widely expected next month, Governing Council member Robert Holzmann warned that such monetary loosening shouldn’t be a substitute for sound economic policy as euro-zone growth stutters.

“Our job isn’t to directly influence the economy, in part as the impact is too broad but also as Europe isn’t facing issues related to the cycle but questions of industrial strategy,” the hawkish Austrian official told reporters Tuesday in Vienna. “The orientation can’t be driven by rate policy, but by a clear strategy, policy and expenditure.”