German investor morale dives to 5-year low

ZEW sentiment index dives on concerns over trade row, Italy's commitment to euro zone

•BERLIN • The mood among German investors is at its darkest in years with a tariff attack on the county's exports largely to blame, a survey showed, as one global economic body said the solution lay in spending more at home.

The ZEW research institute's sentiment index fell to -16.1 in June from -8.2 in May, it said yesterday - the lowest reading since September 2012, and missing a consensus forecast of -14.0 in a Reuters survey.

Weighing on morale were concerns about the new Italian government's commitment to the euro zone, but of potentially far greater immediate economic impact was a festering trade dispute with the United States.

Washington's allies have warned that protectionist policies espoused by President Donald Trump - including punitive import tariffs on steel and aluminium - are weakening the world economy.

But as Europe's biggest exporter to the US - a trade relationship that keeps more than one million Germans in employment - Berlin is more anxious than most to avoid a trade war with Washington.

ZEW president Achim Wambach said the dispute was leaving its mark on the economic outlook, and falls in German exports, industrial output and orders in April also suggested a long sustained recovery could be flagging.

But the Organisation for Economic Cooperation and Development (OECD) said yesterday the upswing remained strong and the government should use its budget surplus to increase investment.

"Your current account got fat because you won productivity and competitiveness compared to the others in Europe. Now, does that give rise to protectionists? Of course!" OECD Secretary General Angel Gurria told reporters in Berlin.

"So basically, you could spend more, yes! You could import more, yes!" Germany's has faced similar criticism from the International Monetary Fund and its euro zone partners, and Mr Trump has partly justified his tariffs by pointing to the US trade deficit with Germany.

But he stunned a broader constituency of US allies at the weekend when he backed out of a joint G-7 communique in Canada that mentioned the need for "free, fair and mutually beneficial trade", and the importance of fighting protectionism.

While the US also runs a trade deficit with the EU as a whole, the impact of protectionist moves risks being particularly acute for Germany, with a car industry heavily reliant on transatlantic trade particularly vulnerable.

Mr Trump has threatened to use national security laws to impose tariffs on car and truck imports.

German carmakers are also struggling to shake off an emissions scandal that has dented their reputation and could cost billions of euros to refit diesel vehicles with greener exhaust filters.

The ZEW survey was taken in the two weeks running up to Monday, which could mean concerns about Italy were more prominent in some respondents' minds.

The new government in Rome comprises anti-establishment parties with a brief to shake up EU institutions, though its economy minister said at the weekend that the country was committed to the single currency.

"On the face of it, the ZEW index suggests... (a German) recession is a significant risk," Ms Jennifer McKeown of Capital Economics wrote in a note. "But note that its past relationship with GDP growth has been very weak and we would not draw any firm conclusions from a particular level," she added, predicting economic growth of around 2 per cent up to end of next year.

That chimes in with a consensus this month among economists that a consumption-driven upswing will continue and, with financial markets showing no discernible reaction to yesterday's data, that view appears not to have shifted significantly.

The OECD predicted German growth of 2.1 per cent this year and next.


A version of this article appeared in the print edition of The Straits Times on June 13, 2018, with the headline 'German investor morale dives to 5-year low'. Print Edition | Subscribe