German investor morale rises sharply in March as fiscal policy shift looms

By Friederike Heine

BERLIN (Reuters) -German investor morale improved more than expected in March, the ZEW economic research institute said on Tuesday, reporting an increase in its economic sentiment index to 51.6 points from 26.0 points in February.

Analysts polled by Reuters had pointed to a reading of 50.3.

"The brighter mood is likely due to positive signals regarding the future German fiscal policy, for example the agreement on the multi-billion-euro financial package for the federal budget," said ZEW President Achim Wambach.

"In particular, prospects for metal and steel manufacturers as well as the mechanical engineering sector have improved," he said in a statement, adding that the sixth consecutive interest rate cut by the European Central Bank meant more favourable financing conditions.

The score, in a range from minus 100 to plus 100, is based on a survey of about 350 Germany-based financial analysts at banks, insurers and large industrial companies.

The second consecutive month of rising sentiment comes as Germany's lower house of parliament is set to vote on a massive surge in borrowing that could boost Europe's largest economy and stimulate growth across the region.

The conservatives and Social Democrats (SPD), who are in talks to form a centrist coalition after last month's election, want to create a 500-billion-euro ($546.05 billion) fund for infrastructure and to ease constitutionally enshrined borrowing rules to allow higher spending on security.

The plans, if implemented, would upend decades of fiscal conservatism in Germany, and have lifted euro zone yields and the euro currency over the past week.

Last week, Germany's DIW economic institute said the infrastructure fund alone could raise economic output by an average of more than two percentage points per year over the next 10 years.

If a defence and infrastructure spending ramp-up is included, growth of 2.1% was expected in 2026, DIW said.

The IfW institute, meanwhile, revised up its 2026 estimate for Germany, predicting 1.5% growth off the back of the expected boom in public spending.

(Writing by Friederike Heine, Editing by Ludwig Burger and Alex Richardson)