The September ZEW survey sent mixed messages for the Eurozone. Current conditions improved and approached their pre-war highs, but expectations fell for the first time since April. In Germany, both indicators strengthened, with the current conditions index reaching its highest level since 2023. As inflation accelerates and maintaining state support becomes increasingly difficult and expensive, the resilience displayed by the economy in recent months appears to be heading toward its end. In the second forecast round for September, we are expected to raise our estimates for inflation and interest rates in 2027, while downgrading our forecast for GDP growth, notes Oxford Economics.
The first warning bell for the Eurozone
The publication of the September ZEW survey sent a mixed signal for the Eurozone. The current conditions index strengthened and approached its pre-war highs from February, while expectations recorded their first decline since April, albeit a marginal one. Thus, although the headline index shows a modest improvement, the underlying dynamic raises questions about whether the Eurozone can sustain the growth momentum it displayed recently. In Germany, both sub-indices improved, likely reflecting the growing push to growth from fiscal policy. The current conditions index reached its highest level since 2023, while economic expectations strengthened only marginally.
Energy and geopolitics threaten resilience
Today's data represents the first major survey showing a worsening of the macroeconomic outlook, following a summer during which the economy demonstrated greater resilience than expected. The Houthi advance toward the Bab el-Mandeb Strait, combined with the lack of signs of improvement in the broader geopolitical situation, has driven energy prices higher and prompted us to shift our baseline scenario toward a prolonged disruption. With inflation accelerating further and government support becoming increasingly costly and hard to maintain, we estimate that the economic resilience of recent months will begin to fade.
More expensive money and lower growth in 2027
In our next forecast round, we are therefore expected to revise upward our forecasts for inflation and interest rates in 2027, while simultaneously lowering our estimates for economic growth. The hardest hit will likely be taken by consumer spending, as rising prices and growing uncertainty limit purchasing power and the willingness of households to spend. The ZEW data thus serves as a first warning signal that the Eurozone's resilience may be tested in the coming months, with the combination of higher energy costs, inflationary pressures, and geopolitical uncertainty threatening to stall the hitherto fragile growth dynamic.
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