Oh Those Confident Germans!!

This week, two key business surveys were released in Germany showing that business managers remain optimistic about the health of the German economy amidst an ongoing European recession. Both the ZEW Economic Sentiment Index and the more recently released IFO Business Climate Survey pointed to strong expectations about the future, pointing to at least a modest recovery in the Eurozone economy.

The confidence in German business leaders comes despite the European Union downgrading its growth forecasts for 2013. The EU now predicts that the European economy will contract 0.3 percent in 2013. Previously, the group had forecast growth of 0.1 percent for 2013. 2014 forecasts were left unchanged.

Earlier this week, the ZEW Economic Sentiment Index, a broad measure of business confidence, rose to 48.2 from 31.5 in January, better than forecasts of a 35.0 reading. The massive jump was boosted by both the current assessment sub-index and the expectations index, meaning that not only are leaders confident on the current state of the German economy but also the near future, pointing to upsides to growth in the near term.

Friday, the German IFO Business Climate Index rose to 107.4 from 104.3 in January, beating expectations of a jump to 105.0. Again, strong jumps in both the current assessment and the expectations sub-indexes point to both stronger growth now and in the near future.

Both of the surveys tend to be good leading indicators for the German, and by default, the broad European economy, meaning that continued strength in Germany could help to drag the Eurozone out of recession, or at least a less severe one. However, the EU downgrading German growth forecasts to 0.5 percent growth from 2.0 percent previously for 2013 shows that headwinds still remain in the German, European, and broad global economies.

Should Germany continue to improve its economic condition, exports will grow and global trade will tick higher. This will help to boost the global economy and could be a potential driver for the next cyclical leg up in the global economy. However, as the summer approaches, expect momentum to cool heading into the end of the second quarter as businesses tend to slow operations in the summer months in lieu of added down time.

The German DAX Index jumped 1.12 percent on the stronger than expected news, driving gains this year to 0.67 percent and 12.12 percent for the past 12-months. Only two stocks in the index traded lower out of 30, with industrials and financials leading stocks higher. Notably, Commerzbank CRZBY shares declined 1.19 percent in Germany after the bank was criticized by bond market behemoths Blackrock BLK and PIMCO for issuing covered bonds backed by risky small- and medium-sized business loans; covered bonds normally are backed by either real estate or other hard assets.