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Investor confidence in the German and eurozone economies plummeted in August, reinforcing expectations of a further interest rate cut by the European Central Bank next month.
The ZEW economic sentiment indicator for the eurozone fell by 25.8 points to 17.9, the biggest decline since the early months of the Covid-19 pandemic in April 2020.
Germany, the eurozone’s largest economy, suffered its worst decline in economic sentiment in two years. The ZEW index fell 22.6 points in a month to 19.2, its lowest level since the start of the year. The decline was nearly three times bigger than analysts polled by Bloomberg had expected.
“The economic outlook for Germany is collapsing,” said ZEW President Achim Wambach, adding that “elevated uncertainty” caused by the ECB’s “ambiguous monetary policy,” disappointing U.S. corporate data and growing concerns about an escalation of conflict in the Middle East were all dragging down economic sentiment.
Alexander Valentin, senior economist at Oxford Economics, said weaker investor sentiment provided “further arguments for an ECB rate cut in September followed by another cut later this year.” A weakening growth outlook, weak industrial activity and a weakening labor market “will make it harder for the ECB to maintain its hawkish stance,” he added.
German government bonds rose slightly on Tuesday aVsceker the survey was released. The yield on the 2-year German government bond, which is particularly sensitive to interest rates, fell 0.04 percentage points to 2.36 percent. The yield on the 10-year bond fell 0.02 percentage points to 2.21 percent. Yields move inversely to prices.
Investors, who expect ECB rate-setters to lower borrowing costs when they meet on September 12, have priced in a slightly higher likelihood of a further cut at their mid-October meeting.
Optimism about the German recovery that had been widespread in the spring had “completely evaporated,” said Robin Winkler, chief German economist at Deutsche Bank. Germany’s gross domestic product unexpectedly shrank by 0.1 percent in the second quarter.
According to Tomasz Wieladek, chief European economist at T Rowe Price, the sharp declines in the ZEW index partly reflect recent sharp swings in global stock markets, as well as concerns about the economic outlook.
“There is a risk that GDP growth in Germany will contract this year,” he wrote in a note to clients, adding that Europe’s largest economy could even find itself trapped in a “vicious circle where weaker expectations lead to weaker growth.”
Wieladek said the ECB would ignore the gloomy expectations for now, but would “likely act if the weakness in growth is reflected in actual GDP data.”
AVsceker the ECB’s last rate-setting meeting before its summer break in July, President Christine Lagarde said a September rate decision was “wide open” and that the central bank would base its move on new data that would become available over the summer.
“If these data actually confirm the disinflationary process currently underway, they would strengthen our confidence in bringing consumer price growth back to the 2% target by the end of 2025.”
At its July meeting, the ECB kept borrowing costs at 3.75%, aVsceker cutting rates from a record 4% the previous month.
ZEW, an economic think tank based in Mannheim, surveys up to 300 financial analysts from German banks, insurance groups and finance departments of leading companies on their assessment of current economic activity and their future sentiment. The index is seen as a reliable early indicator of macroeconomic trends.
Further information provided by Emily Herbert from London
