Euro-area engine room sputters as German downturn risks sharpen

by BLOOMBERG

FRANKFURTGerman investor confidence tumbled to its lowest level since late 2012 amid mounting concerns over global trade and signs of a domestic slowdown, after a report highlighted increased recession risks.

A gauge of financial-market sentiment fell for a third month. For the first time since July 2016, more of those investors surveyed by ZEW saw a worsening of the outlook than forecast an improvement.

The probability of a recession in Europe’s largest economy jumped to 32%, according to a separate report.

The downbeat assessment comes after a US attempt to rewrite international trade rules by imposing import tariffs, triggering a tit-for-tat response by China. Even though the European Union has temporarily been exempted from the metal levies, risks of far-reaching retaliatory measures could still hurt Germany’s export-driven economy — at a time when growth in the country and the broader euro-area appears to be coming off its peak.

ZEW president Achim Wambach cited trade woes as main reason for the drop in expectations while also pointing to weak retail and production numbers.

That array of economic indicators also raised alarm bells at the Dusseldorf-based Macroeconomic Policy Institute. Its gauge, which uses data that have signalled downturns in the past, including factory orders, business confidence, and interestrate spreads, is now orange — the middle of its traffic-light warning system — for the first time since March 2016.

“Volatility in financial markets, which has been evident for several months, is now accompanied by a noticeable deterioration in sentiment and subdued production. This has recently become a typical constellation for the end phase of a cycle,” according to IMK. “Whether such a downward spiral has already begun is currently unclear.”

So far, the Bundesbank has expressed confidence in strong growth ahead as companies work through their orderbooks. Germany’s DAX stock index picked up in April after two months of declines, and the euro has climbed around 16% against the dollar in the past year.

European Central Bank (ECB) officials have taken note of the weakening momentum,

with chief economist Peter Praet saying on Monday that the latest data “point toward some moderation of late, following several quarters of very strong growth”. At the same time, policymakers are still expected to signal further steps toward unwinding unprecedented stimulus at their June meeting, when new staff projections for growth and inflation will be presented.

“One should never base conclusions on single data points, but the fact that this comes after a number of weak data may start to concern the ECB — what’s striking is that ZEW’s indicators point to a slowdown,” said Piet Christiansen, an economist at Danske Bank A/S in Copenhagen. “Policymakers will probably have to revise down growth forecasts in June.”