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

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.

Investor sentiment roadmap

Investor sentiment goes through various phases in an economic cycle — from optimism, euphoria to panic and depression, back to hope and optimism.

James Thomson, investment manager of Rathbones global opportunities fund, discusses the current stage of investor morale.