Investor sentiment in Germany is at its lowest level in five months after weaker-than-expected growth in the first quarter begins to deflate exaggerated expectations for Europe’s biggest economy, data showed on Tuesday.
After already slipping last month, the widely watched investor confidence index calculated by the ZEW economic institute fell by a steeper-than-expected 11.4 points to 41.9 points in May, ZEW said in a statement.
Analysts had been expecting a much shallower decline this month to around 49.0 points and the index is now at its lowest level since December 2014.
“Financial market experts have adjusted their optimistic expectations downward in May due to unexpectedly poor growth figures in the first quarter of 2015 and turmoil on the stock and bond markets,” said ZEW president Clemens Fuest.
“However, only a small number of survey participants actually expect a deterioration of the economic situation,” he added.
Growth in Europe’s biggest economy slowed unexpectedly in the first quarter, with first-quarter gross domestic product (GDP) expanding by a modest 0.3 percent, down from 0.7 percent in the preceding three months.
For the survey, ZEW questions analysts and institutional investors about their current assessment of the economic situation in Germany, as well as their expectations for the coming months.
The sub-index measuring financial market players’ view of the current economic situation in Germany slipped by 4.5 points to 65.7 points in May. ZEW said.
– No trend reversal –
Despite the steeper-than-expected drop, analysts insisted the German recovery remains on track.
“Today’s ZEW index shows that German investors have lost parts of their earlier optimism,” said ING DiBa economist Carsten Brzeski.
But despite the drop, both components of the ZEW “remain far above their historical averages.”
The expert conceded there were still major risks for the German economy.
These included the Greek crisis, which “could still escalate and is clearly more dangerous and explosive than financial market participants seem to believe.”
Weak growth in the United States could harm German exports. And what appeared to be a new strike culture in Germany — with train drivers set to stage an open-ended walk-out — could also have a negative impact, Brzeski said.
But all in all,” today’s ZEW correction is not the beginning of a trend reversal and no reason to become concerned about the German economy. It is rather a sign of … a return of realism,” he said.
Berenberg Bank economist Christian Schulz agreed.
“On balance, far more investors still expect improving rather deteriorating conditions, which shows that we are witnessing a moderation, not a reversal in optimism,” he said.
Natixis economist Johannes Gareis said “two consecutive monthly decreases in the ZEW headline index do not make a trend. The ZEW index has also a tendency to be erratic.
“All in all, we think that the German economy is in a good condition at the moment, spurred in particular by a healthy domestic economy.”
BayernLB economist Stefan Kipar said he expects the German economy to continue to grow at rates of around 0.5 percent in the coming quarters.
“The framework conditions, with the weak euro and low oil prices, remain favourable,” Kipar said.