German investor sentiment plummets as fears over the Ukraine crisis deepen

12th August 2014

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The problems facing Europe are showing no signs of abating as investor sentiment in Germany has nosedived on the back of escalating concerns over the crisis in the Ukraine.

August’s drop in the German ZEW economic sentiment indicator, which measures investors’ expectations for the world’s fourth largest economy, in six months’ time, plummeted from +27.1 to a 20-month low of just +8.6 – far weaker than the consensus forecast which anticipated a fall to +18.

Jennifer McKeown, senior European economist at research group Capital Economics said: “August’s drop in the German ZEW economic sentiment indicator is another worrying sign, particularly as perceptions of current conditions are now weakening sharply too.”

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“The decline must relate largely to fears about the effects of the Ukraine crisis, which could prove short-lived given the recent partial recovery in German equity prices. But the further confidence falls, the greater the risks to actual economic activity.”

Investors in German shares have not felt much joy of late as over the past month the MSCI Germany index loosened by 5% while over six months it is down by 8%.

McKeown also noted that the ZEW current conditions index fell for the second month running to +44.3 – its lowest level since January a deterioration which echoes the recent decline in more reliable indicators of business activity such as the German PMI surveys. She added: “Data later this week is likely to reveal that the German economy, more or less stagnated in the second quarter. While a renewed expansion seems likely in the third quarter and beyond, the recovery seems to have passed its peak.”

Russia announced a ban on the import of numerous agricultural and food products. German federal minister of agriculture Christian Schmidt regretted the import ban, which he said would harm Russia most of all. It is clear though, he added, that Germany will also feel the impacts of the ban.

“Russia’s actions are without doubt a serious challenge to the constructive cooperation we have seen to date between the Russian and German governments in terms of agricultural exports. It is now up to Russia to use the constructive contacts put in place by Europe and the USA,” said Christian Schmidt.

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