Recession fears surface in Germany as investor outlook weakens

Investor confidence in Germany’s economy weakened for a third month as the country’s key manufacturing sector reels from a slump in demand.

The ZEW institute’s gauge of expectations dropped to -10.7 in May from 4.1 in April. Economists polled by Bloomberg had expected a decline to -5. An index of current conditions also fell.

For the latest headlines, follow our Google News channel online or via the app.

“The financial market experts anticipate a worsening of the already unfavorable economic situation in the next six months,” ZEW President Achim Wambach said Tuesday in a statement. “As a result, the German economy could slip into a recession, albeit a mild one.”

The reading comes after an unexpectedly strong fall in industrial production and other weak data raised concern that Europe’s top economy may in fact have endured a winter downturn.

A drop in new manufacturing orders also casts doubt on how strongly it can rebound in the coming months, despite consumer demand for services remaining strong.

The European Commission on Monday forecast growth of just 0.2 percent for this year, followed by 1.4 percent in 2024. That’s weighing on the 20-nation euro zone as a whole, which separate data Tuesday confirmed grew by just 0.1 percent in the first quarter from the previous three months.

Some member-states shrank during that period, as numbers earlier in the day from the Netherlands showed. Others contracting at the start of the year include Ireland, Austria, and Lithuania.

In Germany, sluggish activity hasn’t harmed the labor market much, with worker shortages also helping support a quick rise in pay in recent wage deals.

The toughest monetary-tightening campaign in the European Central Bank’s history will offer an increasingly powerful headwind, however. Banks are already curbing credit to companies while demand for new loans is falling.

“The sentiment indicator decline is partly due to expectations of further interest-rate hikes by the ECB,” Wambach said. “Additionally, the potential default by the United States in the coming weeks adds uncertainty to global economic prospects.”

Read more:

UK pound steadies after economy posts fragile growth in first quarter

G7 finance leaders’ meeting dominated by US debt ceiling standoff

Treasury Secretary Yellen says US could default as soon as June 1