Drop in German investor morale may have called the peak in growth

May 13, 2014

A BMW employee assembles a BMW motorcycle at the company's factory in BerlinEurope’s growth engine may be on the verge of gearing down, according to an indicator of German investor morale that recorded its biggest drop in one and a half years on Tuesday.

For a euro zone economy that is broadening, but still relying heavily on Germany for growth, as well as inflation that is dangerously low and well below target, that may add another line to the European Central Bank’s worry sheet.

The ZEW institute’s index of analyst and investor sentiment fell for the fifth month in a row to 33.1 in May from 43.2, coming in well below the most pessimistic forecast of 37.1 in a Reuters poll.

The current conditions index, however, rose sharply to 62.1, higher than consensus for 60.5.

Thomas Harjes at Barclays says this is a bad signal:

Historically, the business cycle has often peaked shortly after the improving ZEW assessment of the current situation had overtaken declining investor expectations. For the Q1 GDP flash release on Thursday, we expect growth to have peaked at 0.7 percent quarter-on-quarter.

Capital Economics’ European economist, Jessica Hinds:

The headline index has overstated the speed and duration of recoveries in the past and changes in the expectations index have tended to be a reasonably reliable indication of turning points to come in the hard data.

Data later this week are likely to reveal that the German economy made a strong start to the year, perhaps expanding by a quarterly 0.7 percent or so. But today’s survey broadly supports our view that this pace of growth is unlikely to be sustained.

Germany is expected to clock 0.7 percent growth in the first quarter, compared with 0.4 percent for the euro zone as a whole. The data are released later this week.

More concerning is the fact the outlook for Germany already was for a slowdown to a 0.4-0.5 percent quarterly rate for the remainder of the year, according to the latest Reuters survey of analysts taken in April.

The fall in investor morale is in line with recent hard data on exports, industrial orders and output which have also reflected slower growth. 

Any slowdown in German economy will hurt overall growth in the euro zone, which is also forecast to slow to 0.3-0.4 percent quarterly rate for the rest of the year.

But others said the overall picture was not as weak as it appeared.

JPMorgan’s Greg Fuzesi:

Today’s ZEW survey is still consistent with an upbeat message about the German economy, even if it does hint at slightly less momentum.

Jörg Krämer, chief economist at Commerzbank:

One major factor is likely to be the fact that, with strong growth expected in the first quarter, the situation is now considered to be so good that an increasing number of respondents no longer believe in a further improvement. The decline in the ZEW does therefore not signal the end of the upswing.

– with additional reporting by Ishaan Gera

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