Euro-Area Economy's Soft Patch Starts to Rattle Investor Nerves

(Bloomberg) -- Investors are losing faith in the strength of the euro-area economy after a string of numbers that fell short of expectations.

A monthly report from research group Sentix said their view of the economy has turned negative for the first time since July 2016. It said the downward dynamic was “even more pronounced” for Germany, where separate data on Monday showed a sharp drop in exports in February.

The sudden weakness comes after the best year for euro-area economy in a decade, and has been blamed on a number of exceptional factors from bad weather to bottlenecks constraining the ability to handle additional demand. There’s also the uncertainty surrounding the trade spat between U.S. President Donald Trump’s administration and China.

“The good-weather period for the economy in the euro area is coming to an end,” said Patrick Hussy, managing director at Sentix GmbH in Frankfurt.

In the latest salvo, China is evaluating the potential impact of a gradual yuan depreciation, people familiar with the matter said, as the country’s leaders weigh their options in the trade dispute.

Signs of a euro-area slowdown come at a bad moment for the the European Central Bank as policy makers debate how to end their bond-buying program and an inflation pickup remains elusive.

Executive Board member Benoit Coeure warned on Friday that protectionist sentiment has already “contributed to tighter financial conditions.”

Europe has until May 1 to stop the U.S. from imposing tariffs on steel and aluminum, and both German Chancellor Angela Merkel and French President Emmanuel Macron will visit Trump in Washington this month.

With the U.S. its largest export market last year, a lot is at stake for Germany. While growth is solid and unemployment remains at the record low, this already looks like the weakest start of the year for Europe’s biggest economy since 2009.

“At least in the near term, sound fundamentals, low interest rates, record high employment, high capacity utilization, low inventories and filled order books are strong arguments in favor of a re-acceleration of the economy,” said Carsten Brzeski, chief economist at ING-Diba AG in Frankfurt. “However, if anything downside risks for the economy have clearly increased in recent weeks.”

--With assistance from Kristian Siedenburg

To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Fergal O'Brien, Kevin Costelloe

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