Germany’s ZEW Economic Sentiment Index fell from 47.5 to 41.8 in July, missing forecasts and ending an eight-month of consecutive increases. Factors such as declining exports, political uncertainty in France, and unclear ECB monetary policy contributed to the decline.
The economic sentiment gauge for Germany, which reflects financial experts’ future expectations, fell more than anticipated in July, marking its first decline after eight consecutive months of increases. The ZEW Economic Sentiment Index for Germany eased from 47.5 to 41.8 points, below the expected 42.5.
Despite this decline, the barometer of economic morale remained positive, indicating that optimist experts still outnumber pessimists by 41.8 percentage points.
Interestingly, the sub index for current conditions improved from -73.8 to -68.9 points, countering expectations of a decline to -74.3. For the broader eurozone, the financial market experts’ gauge concerning economic development also saw a decrease in July, dropping to 43.7 from 51.3, well below the expected 48.1. This marks the first month-over-month decline in 2024.
The survey revealed that financial market analysts observed an improvement in the declining inflation trend in both Germany and the eurozone.
Factors behind the drop in the sentiment index
“The economic outlook is worsening. For the first time in a year, economic expectations for Germany are falling,” ZEW President Professor Achim Wambach said.
He highlighted several factors contributing to the worsening economic outlook, including a sharper-than-expected decrease in German exports in May, political uncertainty in France, and a lack of clarity regarding the future monetary policy of the ECB.
Sector Sentiment: Retail, consumer goods rise, banks Fall
Sector-wise, sentiment improved most for retail and consumer goods, up 6.5 percentage points to 24.2, followed by construction, which rose 3.7 percentage points to 3.8.
Excluding the marginal uptick in sentiment for the telecommunication sector, up 0.6 percentage points to 21.6, all other sectors experienced a decline in economic morale.
The largest drops were felt by banks, down 15.6 points to -3.7, likely to have been affected by rising political risks in France and expectations for lower interest rates. Utilities also suffered an 11.1 percentage-point decline to 12.2 points in economic conditions.
According to the July 2024 euro area bank lending survey published Tuesday by the ECB, euro area banks reported a slight further net tightening of their credit standards, with significant tightening in the commercial real estate industry.
Loan demand continued to decline for firms, while there was a notable increase for households, the first since 2022.
The ECB is widely anticipated to keep interest rates steady on Thursday, but financial markets are discounting a possible rate cut at the September meeting.
Market Reactions
European stocks slightly trimmed session losses after the publication of the ZEW Economic Sentiment report.
The German DAX was 0.3% lower for the day by 11:25 a.m. CET, marking the second straight drop after Mondays 0.7% decline. Porsche AG, Puma, and Adidas were the DAX’s worst performers Tuesday, declining 4.3%, 3.5%, and 2.2%, respectively, while the top performers were Fresenius and Rheinmetall, up 1.8% and 0.8%, respectively.
The broader Euro Stoxx 50 and Euro Stoxx 600 were down by 0.5% and 0.4%, respectively.
Bund yields traded lower, easing by 4 basis points to 2.44%, eyeing the lowest level since the end of June.
The euro held broadly steady at 1.09 dollars, now battling for the 11th positive day in the last two weeks of trading.
