Polls suggest the center-right is gaining momentum and confidence is rising
Fresh off a victory in European Parliament elections, German Chancellor Angela Merkel and her Christian Democratic Union (CDU) party increased her spread over its main challenger, the Social Democratic Party (SPD), based on a weekly Forsa/Stern poll ended June 12th.
While the CDU lost a point to 35% on the prior week, the SPD dropped three points to 21%, and Merkel's most likely coalition partner, the pro-business FDP, gained one point to 15%. The decline of the SPD, led by Foreign Minister Frank-Walter Steinmeier, may reflect the party's inability to win state aid for retail-giant Arcandor, which filed for insolvency last week.
ZEW published its economic sentiment indices yesterday. The survey said that investor and analysts expectations for economic developments six months ahead increased to 44.8 from 31.1 in May, while current economic conditions improved to -89.7 from -92.8 in May.
We continue to have a bullish bias on Germany, due in part to the fiscally conservative leadership of Merkel. The latest German CPI number in May mirrored that of the Eurozone at 0.0% on an annual basis. The disinflationary trend on prices (driven by the decline of fuel costs) will help encourage consumers to spend and if the Euro can back down off of $1.40 it will benefit the export-heavy economy. We still expect to see mild growth starting in early '10 as the country works through ~6% GDP contraction this year. Despite a contraction in the unemployment rate in May of 10bps to 8.2%, we believe the number will rise sequentially and provide a headwind for sentiment. Expect employment to remain a focal point coming into elections in late September.