Euro-Area Engine Sputters as German Downturn Risk Sharpens

(Bloomberg) -- The euro area’s economic expansion is standing on increasingly shaky ground after reports showed German investor confidence tumbling to its lowest level since late 2012 and the risk of a recession in the nation jumping.

The sentiment gauge from ZEW showed more investors now see a worsening in Europe’s largest economy than forecast an improvement, a mood swing that ZEW President Achim Wambach blamed on the U.S. trade dispute combined with weak domestic retail and production numbers.

The drop in confidence came as the Dusseldorf-based Macroeconomic Policy Institute (IMK) said the probability of a recession in Germany over the next three months has jumped to 32 percent. While that outcome remains unlikely, the gauge is up sharply from 6.8 percent in March.

It follows U.S. attempts to rewrite international trade rules by imposing import tariffs, triggering a tit-for-tat response by China. Even though the European Union has temporarily been exempted from the metal levies, risks of far-reaching retaliatory measures could still hurt Germany’s export-driven economy -- feeding into signs that growth in the euro area is coming off its peak.

At the IMK, the recession gauge, which uses data that have signaled downturns in the past is now orange -- the middle of its traffic-light warning system -- for the first time since March 2016. That was just as the German economy was entering a mild slowdown.

“Volatility in financial markets, which has been evident for several months, is now accompanied by a noticeable deterioration in sentiment and subdued production,” according to IMK. “This has recently become a typical constellation for the end phase of a cycle.”

The German data contrasts with economic reports on Tuesday in Europe’s second-largest economy, the U.K., where wages rose at the fastest pace in almost three years. Accelerating pay growth and slowing inflation raise the prospect of an end to the squeeze on British living standards. The Bank of England is widely expected to raise interest rates next month.

So far, Germany’s Bundesbank has maintained its confidence in the country’s strong growth continuing as companies work through their order books. The DAX stock index has also signaled optimism that the current weakness might be brief, picking up in April after two months of declines. The euro has climbed around 16 percent against the dollar in the past year.

European Central Bank officials have taken note of the weakening momentum, with chief economist Peter Praet saying on Monday that the latest data point to “some moderation of late, following several quarters of very strong growth.”

That’s a likely reason for policy makers to keep their stimulus settings unchanged when they meet next week, though economists and investors are still expecting the subsequent decision in June to deliver further steps toward ending quantitative easing.

“One should never base conclusions on single data points, but the fact that this comes after a number of weak data may start to concern the ECB,” said Piet Christiansen, an economist at Danske Bank A/S in Copenhagen. “What’s striking is that ZEW’s indicators point to a slowdown.”

--With assistance from Andre Tartar and Kristian Siedenburg

To contact the reporter on this story: Carolynn Look in Frankfurt at clook4@bloomberg.net.

To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Jana Randow

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