Optimism in the German economy has taken a significant hit in March, where one of the most important sentiment indicators plummets after renewed unrest in the Middle East.
The ZEW indicator of economic expectations falls to minus 0.5 from a level almost 60 points higher the previous month. Thus, the progress that was evident at the beginning of the year has almost disappeared in one month. At the same time, the assessment of the current economic situation remains weak, although it lifts slightly.
The ZEW indicator is a monthly measurement of economic expectations among financial analysts and investors. They are asked whether they expect the economy to improve, worsen, or remain unchanged over the next six months. The result is calculated as a balance between optimists and pessimists, where a negative number means more expect a downturn than an upturn.
Unrest is a bad thing
According to ZEW, the decline is closely linked to the escalating conflict in the Middle East, which is pushing energy prices up and increasing inflation fears. This creates uncertainty about whether the budding economic recovery in Germany can maintain its pace.
- The indicator has collapsed, says the assessment from ZEW's president Achim Wambach, who also points out that the effect depends on the duration and intensity of the conflict.
The decline particularly affects energy-intensive industries. Both the automotive industry, the chemical and pharmaceutical sectors, and the machinery industry are experiencing significant drops in expectations. The steel and metal industries, as well as the construction sector, are also under pressure.
This suggests that investors fear a broader slowdown in the part of the German economy that normally drives exports and growth.
At the same time, a large majority of those surveyed expect rising inflation in both Germany and the euro area. This impacts interest rate expectations, with more now anticipating higher rates in the future, which particularly affects investment and construction activity.
The eurozone is also weakening
The development is not limited to Germany. Expectations for the economy in the euro area are also falling significantly and moving into negative territory. At the same time, the assessment of the current economic situation is worsening.
Overall, the survey paints a picture of a European economy where optimism has quickly been replaced by uncertainty.
