German Economic Sentiment Falls to Lowest Level in Nearly Two Years

In April, investor confidence in Germany fell to its lowest level in almost 21 years. This sudden and deep drop was a result of growing fears over retaliatory tariffs and their likely inflationary effect on world trade. The ZEW (Zentrum für Europäische Wirtschaftsforschung) German economic sentiment indicator fell off a cliff to -14 points. This is a huge drop down from 51.6 in March. This drop is a sharp reversal from economists’ predictions of a smaller drop to 9.5 points.

Indeed, negative sentiment is not only an issue for Germany. The eurozone’s economic sentiment indicator crashed, more than expected, to -18.5 points from -8.4 expected. This is the eurozone’s sharpest monthly drop in the indicator since March 2022. It mirrors the lowest TPI reading we’ve ever experienced since December 2022.

Rising Global Uncertainty

In his opening remarks, ZEW President Achim Wambach, PhD, emphasized the increasing uncertainty about global trade patterns. He added that the reciprocal tariffs announced have raised global uncertainty to unprecedented levels. This period of upheaval is already affecting economic sentiment in Germany and the rest of Europe.

“The erratic changes in the US trade policy are weighing heavily on expectations in Germany, which have sharply declined.” – Achim Wambach, PhD, ZEW President

The German economic sentiment indicator, which have a one-to-one return with expectations over the fortunes of both the German and eurozone economies. This downturn has especially affected export-oriented industries – including the automobile, chemical, metal, steel and mechanical-engineering sectors – the hardest.

Implications for Monetary Policy

The ZEW report indicates that overall economic conditions remain positive. This should provide cover for the European Central Bank (ECB) to entertain more aggressive interest rate cuts. Economic experts are becoming extremely more pessimistic by the day. This continued decline risk will force the ECB to act and provide stimulus to the economic efforts.

The ZEW’s overall assessment shows that the economic situation is not only difficult but changing very quickly. The larger plunge from past levels, where it went from 54.3 to -39.3 points, shows the volatility seen today at its best.

The Path Ahead

Although there have been recent positive hints in Germany’s ZEW economic sentiment indicator, this latest data represents a major blow. Therefore, the drop from 51.6 to -14 points in a single month is staggering. This sudden slowdown should cast a long shadow over our future growth expectations.

Analysts further caution that ongoing trade policy uncertainty would derail these positive fixed by hampering recovery efforts. As global uncertainty continues to cast a long shadow, businesses and policymakers on both sides of this critical partnership will have to tread lightly to avoid damaging havoc.