German investor morale plunges as recession fears rise

(Reuters) -German investor sentiment fell more than expected in May, pointing to a worsening of the already unfavourable economic situation in the next six months and spurring recession fears.

“The German economy could slip into a recession, albeit a mild one,” ZEW president Achim Wambach said.

The ZEW economic research institute said on Tuesday that its economic sentiment index fell to -10.7 points from 4.1 points in April. A Reuters poll had pointed to a May reading of -5.3.

The fall took the ZEW indicator into negative territory for the first time since December 2022.

The decline is partly due to expectations of further interest rate hikes by the European Central Bank, Wambach said.

“The third drop in a row for the German ZEW index marks a turning point for the worse as any growth optimism from the start of the year evaporates,” said Carsten Brzeski, global head of macro at ING.

Weak German macroeconomic data, the U.S. debt ceiling debate, banking turmoil and expectations of further rate hikes, seem to have dented optimism, Brzeski said.

The assessment of the current economic situation in Germany also worsened, falling to -34.8 points from -32.5 in April.

“A recession in Germany is not our base case, but the economy has been tiptoeing around one since the fourth quarter, so it will be a question of rounding and revisions to the quarterly GDP numbers in the end,” said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics.

The German economy stagnated in the first quarter of 2023, after shrinking by 0.5% in the fourth quarter of 2022, reviving fears of a technical recession, defined as two consecutive quarters of contraction.

Detailed results for the first quarter will be released by the statistics office on May 25.

“The main story is that growth in the euro zone’s largest economy effectively has stalled,” Vistesen said.

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