German investor sentiment tumbled in April amid worries about the trade spat between the US and China and the situation in Syria, according to the latest survey from the ZEW Center for European Economic Research in Mannheim.
The indicator of economic sentiment fell to -8.2 from 5.1 the month before, massively missing expectations for a smaller decline to -1.0.
Meanwhile, the current situation index dropped to 87.9 in April from 90.7 in March, missing expectations for a reading of 88.0.
The index gauging economic expectations in the eurozone declined to 1.9 from 13.4 in March, falling well short of the 7.3 forecast.
Professor Achim Wambach, President of ZEW, said: “The reasons for this downturn in expectations can mainly be found in the international trade conflict with the United States and the current situation in the Syrian war. The significant decline in production, exports and retail sales in Germany in the first quarter of 2018 is also having a negative effect on the future economic development.”
Capital Economics said April's decline suggests that protectionist fears are taking their toll on the export-reliant economy.
“The deterioration in the ESI probably reflected both the escalation in protectionist rhetoric between the US and China, which will have raised policy uncertainty for German export-oriented firms, and the recent disappointing official data out of Germany.
“The fact that the ESI is below zero means that a majority of investors see German economic conditions worsening over the next six months. On the face of it, the ESI suggests that annual GDP growth will slow sharply from Q4's 2.9%. But the historic relationship between the ESI and growth is very loose. Admittedly, the hard data for Q1 so far have been particularly weak. But this in part reflects temporary effects related to the weather and a flu outbreak. And while Germany is vulnerable to increased protectionism, at this stage we doubt that an all-out trade war will materialise.
“Meanwhile, with the new grand coalition set to loosen fiscal policy slightly, we remain fairly optimistic about the outlook. Overall, then, we expect only a modest slowdown and see the German economy expanding by 2.5% this year and 2.0% next.”
Oxford Economics said: “After last week's continued tumble of the Sentix, it was expected the ZEW could reach negative territory for the first time since mid-2016 (in the wake of the British Brexit vote). But the magnitude of the drop should come as a surprise to markets, and being the second such drop in a row, may be the harbinger of more bad news to come – in particular with respect to the PMIs next week.
“However, economic sentiment tends to be volatile and may well be exaggerating fears of an escalation of the trade conflict or the war in Syria. As current conditions remain fairly bright, we do not expect economic activity to nose-dive in Q2, although it might not fully bounce back from the soft patch observed in Q1. But risks to the second half of the year seem to be mounting.”