German ZEW expected to fall further in October

In October, the ZEW investor economic sentiment indicator is expected to have dropped to 7.1 from 12.1 before, with markets remaining pessimistic over the global outlook for growth. As before, the forward-looking expectations component is likely to lead the decline but there should also be a sizeable drop in the assessment of current conditions (despite it having held up surprisingly well in recent months). 

Interestingly, there has been a growing divergence between the market and corporates in their views of future economic activity, as seen in the ZEW survey on the one hand and the PMIs and Ifo on the other. This is not likely to persist for long and some further weakening also expected in the (manufacturing) PMI and Ifo expectations due to the weakening global outlook, with other shocks also adding uncertainty (VW, refugees). 

Last week's poor factory order, industrial production and trade data are also likely raise concerns over the resilience of the German economy. While these data have been volatile over the summer, we should see some rebound coming from the domestic sector in the hard data for September, while foreign non-euro area orders and orders for motor vehicles are likely to remain weak for longer. 

While the weakness in demand from China was already evident since April, more recently the stabilisation in exports to the US and the UK may be what is feeding through in the weaker-than-expected August data, along with some smaller school holiday effects.