Investors’ confidence in Germany waned for a third month, reigniting fears that Europe’s largest economy is heading for a recession.
(Bloomberg) — Investors’ confidence in Germany waned for a third month, reigniting fears that Europe’s largest economy is heading for a recession.
The ZEW institute’s gauge of expectations fell to -10.7 in May from 4.1 in April — the first sub-zero reading of 2023. Economists polled by Bloomberg had expected a decline to -5. An index of current conditions also deteriorated.
“The financial-market experts anticipate a worsening of the already unfavorable economic situation in the next six months,” ZEW President Achim Wambach said Tuesday in a statement. “As a result, the German economy could slip into a recession, albeit a mild one.”
The reading comes after an unexpectedly strong decline in industrial production and other weak data raised concern that Europe’s top economy may have already endured a winter downturn. A drop in new manufacturing orders also casts doubt on how strongly it can rebound in the coming months, despite consumer demand for services remaining strong.
The ZEW’s track record in predicting economic turning points bodes ill for Germany, according to Carsten Brzeski, global head of macro at ING.
“Today’s ZEW sends a worrisome message,” he said in a report to clients. “Three consecutive drops are a new trend, a trend in the wrong direction.”
The International Monetary Fund on Tuesday warned that tighter financial conditions and the adjustment to higher energy prices are weighing on Germany. It expects economic growth “to stay near zero in 2023, before gradually strengthening to 1%-2% during 2024-26 as the lagged effects of monetary tightening gradually dissipate and the economy adjusts to the energy shock.”
Similarly, the European Commission this week forecast German GDP will rise just 0.2% for 2023, followed by 1.4% in 2024. That’s weighing on the 20-nation euro zone, which separate data Tuesday confirmed grew by just 0.1% in the first quarter from the previous three months.
Some member-states shrank during that period, as numbers earlier in the day from the Netherlands showed. Others contracting at the start of 2023 include Ireland, Austria, and Lithuania. A second reading due on May 25 will reveal whether German output suffered two negative quarters in a row, or whether an initial estimate for zero growth holds.
For now, sluggish activity hasn’t harmed its labor market much, with worker shortages also helping support a quick rise in pay in recent wage deals.
The toughest monetary-tightening campaign in the European Central Bank’s history will offer an increasingly powerful headwind, however. Banks are already curbing credit to companies while demand for new loans is falling.
“The sentiment indicator decline is partly due to expectations of further interest-rate hikes by the ECB,” Wambach said. “Additionally, the potential default by the United States in the coming weeks adds uncertainty to global economic prospects.”
–With assistance from Kristian Siedenburg, Joel Rinneby, Barbara Sladkowska and Cagan Koc.
(Updates with IMF in seventh paragraph)
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