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Sharp Drop In German Sentiment

James Boston
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Today’s ZEW indicators for both the Eurozone and it’s largest economy, Germany, have come in sharply lower as sentiment in the single currency bloc reaches a new long term low. The headline Economic Sentiment measure for the Eurozone dived to 23.7 in the month of August, from a previous reading of 48.1, the negative surprise element was substantial as markets had been anticipating a more moderate fall to just 41.3.

Germany’s ZEW Economic Sentiment number has dropped to just 8.6 in August from a figure of 27.1 in July, the market had been expecting a drop to 18.2. It has been more than two years since the German indicator underwent a fall of this magnitude and thanks to contractions in this indicator over the previous seven months the ZEW is now at new 24 month low. The Current Situation indicator in Germany has also experienced a significant fall today, the reading for August now stands at 44.3, compared to 61.8 in July, the market expectation for this was for a drop to 55.5 for the month.

Although the magnitude of the fall in sentiment is surprising, the general trend is clear and has been for some time. The concerns however continue to mount and the drag on outlook is now threefold. Geopolitical tensions are the latest consideration for the sentiment survey participants, Germany more so than any of it’s European peers will be the hardest hit by sanctions imposed on Russia due to the Ukrainian situation. The sanctions hit right at the heart of Germany’s industrial export sector, this area of the economy is healthy but uncertainty around the likely duration of the sanctions are undoubtedly weighing on sentiment. When this is coupled with the general dip in the global recovery and the failure of the Eurozone economic return to gain traction the caution shown by the Germans is understandable.

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