German economic confidence falls more than expected: Is recovery in danger?

He Germany’s economic confidence indexThe index, which reflects financial experts’ future expectations, fell more than expected in July, marking its first decline after eight consecutive months of increases. The ZEW index of economic confidence in Germany fell from 47.5 to 41.8 points, below the expected 42.5.

Despite this decline, The economic morale barometer remained positiveindicating that optimistic experts continue to outnumber pessimistic ones by 41.8 percentage points.

Curiously, The current conditions subindex improved from -73.8 to -68.9 pointscontradicting expectations of a decline to -74.3. In the euro area as a whole, the financial market experts’ indicator of economic developments also registered a decline in July, from 51.3 to 43.7 points, well below the 48.1 expected. This is the first month-on-month decrease in 2024.

The survey revealed that analysts of the financial market They noted an improvement in the downward trend of inflation in both Germany and the euro area.

Factors explaining the decline in the sentiment index

“The economic outlook is worsening. For the first time in a year, economic expectations for Germany are falling“, said ZEW President Professor Achim Wambach.

He highlighted several factors that contribute to the worsening economic outlookamong them a German exports decline in May greater than expected, political uncertainty in France and the lack of clarity regarding the future monetary policy of the ECB.

Sector sentiment: Retail and consumer goods up, banks down

By sectors, Confidence improved especially in retail trade and consumer goodswith an increase of 6.5 percentage points to 24.2, followed by construction, which rose 3.7 percentage points to 3.8.

Excluding the marginal rebound in confidence in the telecommunications sectorwhich rose 0.6 percentage points to 21.6, all other sectors experienced a decline in economic morale.

The biggest falls were suffered by bankswith 15.6 points less, up to -3.7, probably affected due to the increase in political risks in France and expectations of lower interest rates. Public services also suffered a decline of 11.1 points, to 12.2 points, in economic conditions.

According to the Eurozone Bank Lending Survey for July 2024, published by the ECB on Tuesday, Eurozone banks reported a slight further net tightening of their lending standardswith a significant tightening in the commercial real estate sector.

The demand for loans continued to decline for businesses, while there was a notable increase for households, the first since 2022. The ECB is expected to keep interest rates steady on Thursday, but Financial markets are pricing in a possible rate cut at the September meeting.

Market reactions

European stock markets slightly reduced losses of the session following the publication of the ZEW economic sentiment report.

He German DAX was down 0.3% at 11:25 CET, marking its second consecutive drop following Monday’s 0.7% decline. Porsche AG, Puma and Adidas were the lowest values ​​of the DAX, with declines of 4.3%, 3.5% and 2.2%, respectively, while Fresenius and Rheinmetall rose by 1.8% and 0.8%, respectively.

He Euro Stoxx 50 and the Euro Stoxx 600 fell by 0.5% and 0.4%, respectively. The performance of German bonds fell 4 basis points to 2.44%, reaching its lowest level since late June. The euro remained practically stable at 1.09 dollars.thus adding its eleventh positive day in the last two weeks of trading.