The weakening trend in German economic sentiment continued in July with financial experts seeing limited potential for the economy to improve further. Debt woes in many European nations as well as fiscal tightening is likely to dent the recovery in Germany.
The economic sentiment indicator dropped by 7.5 points to 21.2 points in July, the lowest level since April 2009, the Centre for European Economic Research, or ZEW, said. This value is below the indicator's historical average of 27.4 and the expected reading of 25.3. "This is a stark contrast to the economic situation," the Mannheim based think-tank said. Positive data on industry activity show the favorable development of the German economy during the second quarter of 2010.
This might have contributed to the further improvement of the assessment of the current economic situation in July. The corresponding indicator rose by 22.5 points to 14.6. For the first time since July 2008, this indicator turned positive and surpassed the expected minus 1.2 level. Around 287 analysts participated in the survey.
"Contrary to the positive assessment of the current economic situation financial experts expect that the dynamics in German business activity will slow down towards the end of this year due to still existing uncertainties regarding the handling of the crisis of financial markets and the crisis of sovereign debt", said ZEW President Wolfgang Franz.
The fall in the headline ZEW index suggests that worries about the banking sector have not really been alleviated by the promise of stress tests to come, according to Jennifer McKeown at Capital Economics. "This might be because the scenarios that will be considered are not severe enough or reflect a lack of clear commitment on government funds for recapitalization," the economist noted.
The ZEW index is likely to fall further in the months ahead, signaling a slower pace for the economy, Commerzbank analyst Ralph Solveen noted. However, this certainly does not mean the recovery is over. The analyst said the German economy will not possibly sustain the growth rate of up to 1.5% sequentially, which is now emerging for the second quarter.
According to ZEW, the significant improvement in the economic situation together with the decline in expectations signals that - until the end of this year - the potential for further improvements of the German economy seems to be widely used up. In particular, the crisis in sovereign debt and the resulting need for consolidation of budgets in various nations seem to have contributed to the subdued economic expectations.
The economic expectations for the Eurozone slipped by 8.1 points in July. The respective indicator now stands at 10.7 points. The indicator for the current economic situation in the Eurozone improved by 14.3 points and now stands at minus 26.5 points.
by RTT Staff Writer
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