Economic sentiment in Germany and the euro zone plunged in August due to a slowdown in global trade, stock market turmoil and tensions in the Middle East.
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The ZEW Economic Sentiment Index, a key indicator of financial experts’ expectations, fell significantly from 41.8 points in July to just 19.2 points in August.
The drop in sentiment reflects growing pessimism about the country’s prospects and highlights broader concerns about the eurozone.
This decline was not only lower than market expectations of a more gradual decline of 32 points, but also the steepest monthly decline since July 2022.
Similarly, business confidence across the euro area deteriorated, with the corresponding index falling from 43.7 to 17.9 points, the lowest level since February and well below expectations of 35.4. The 25.8-point decline marked the most severe monthly deterioration in economic morale in the region since April 2020.
The evaluation of Germany’s current economic situation also deteriorated, with related indicators dropping by 8.4 points to -77.3 points. However, the Eurozone situation indicator showed a slight improvement, rising by 3.7 points to -32.4 points.
Why have sentiments in Germany and the eurozone soured?
The euro zone’s economic powers face a series of economic challenges that threaten to undermine their already shallow 2024 recovery.
The slowdown in global trade, exacerbated by weaker demand in key markets such as China, is weighing heavily on Germany’s export-driven economy.
“Germany’s economic outlook is crumbling. In this survey, we observed the strongest decline in economic expectations in the past two years,” ZEW Chairman Professor Achim Wambach said of the survey results.
Wambach said continued uncertainty due to unclear monetary policy, disappointing U.S. business data and escalating tensions in the Middle East were contributing to the decline in sentiment.
“More recently, this uncertainty has manifested itself in turmoil in international stock markets,” he added.
The survey showed a deterioration in sentiment across the major stock market indexes, with expert morale for the DAX and STOXX 50 falling by 6.5 and 4.6 points, respectively.
Financial market analysts also turned bearish on the dollar, expecting the weakening economy and possible interest rate cuts by the Federal Reserve to weigh on the dollar. The sentiment index, which measures the dollar’s strength against the euro, fell 24.2 points from the previous month to -7.9 points.
By sector, sentiment declined in almost all major sectors, with the exception of utilities, which rose slightly by 0.7 points.
The steepest decline was seen in economically sensitive sectors such as retail and consumer staples, which fell by 24.2 points, reflecting concerns that high inflation and rising interest rates would reduce consumer demand. Other sectors that fell sharply include electronics, which fell by 18.1 points, and chemicals and pharmaceuticals, which fell by 17.2 points.
market reaction
Despite the dire economic indicators, market reaction was relatively muted. After the release of ZEW statistics, the euro stabilized at 1.0920.
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The Euro STOXX50 index also showed resilience, gaining 0.3% during trading. Strong performers within the index were Siemens AG, Sanofi and Enel Spa, rising 1.5%, 1.2% and 1.1%, respectively.
Among major country indexes, Spain’s IBEX 35 rose 0.5%, outperforming other indexes, while France’s CAC 40 was flat. In Germany, Siemens Energy led the rise with a 2.6% increase, while pharmaceutical and laboratory equipment provider Sartorius fell 3.7%.
In France, luxury brands such as LVMH, Kering and Hermès suffered some declines, reflecting concerns about slowing demand in key markets.
In Spain, Caixa Bank rose 1.7%, while pharmaceutical company Grifols fell 5.3% on news of a possible securities law investigation.
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