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Recession fears in focus as German investor morale nosedives

Reuters logo Reuters 13/08/2019 By Madeline Chambers
FILE PHOTO: German Economy Minister Altmaier and Soeder, Prime Minister of Bavaria, pose at R9200 mining excavator of 'Liebherr' during the official opening tour of 'Bauma' Trade Fair in Munich © Reuters/Michaela Rehle FILE PHOTO: German Economy Minister Altmaier and Soeder, Prime Minister of Bavaria, pose at R9200 mining excavator of 'Liebherr' during the official opening tour of 'Bauma' Trade Fair in Munich

The mood among German investors plummeted in August to its most pessimistic since the peak of the euro zone debt crisis, a leading survey showed on Tuesday, heightening concerns that Europe's biggest economy is heading for recession.

The sharp drop in the monthly ZEW survey, blamed on trade conflict and uncertainty over Brexit, sent German blue-chip shares <.GDAXI> to an intraday low as it prompted investors to switch into safer assets like government bonds.

Economic sentiment among investors fell to -44.1 from -24.5 in July, its lowest since Dec. 2011 and way short of expectations for a dip to -28.5.

"The ZEW survey gives a further clear warning signal of recession for the German economy," said Uwe Burkert, chief economist at LBBW Research. 

Traditionally driven by strong sales of its products abroad, Germany's economy has this year increasingly relied on domestic demand to spur growth as exports, led by manufactured goods, have been hit by a broad-based downturn and tariff disputes that have acted as a brake on global trade.

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Data on Wednesday is expected to show German gross domestic product shrank marginally quarter on quarter between April and June, and economists are scaling back their already modest forecasts for the third quarter.

ZEW President Achim Wambach said the survey pointed to a significant deterioration in the economic outlook, and its gauge measuring investors' assessment of current conditions fell to -13.5 from -1.1 in July. Analysts had predicted -7.0.

"The most recent escalation in the trade dispute between the US and China, the risk of competitive devaluations and the increased likelihood of a no-deal Brexit place additional pressure on the already weak economic growth," Wambach said in a statement.

a man standing in front of a fire: FILE PHOTO: A technician works at the Badische Stahlwerke (BSW) steel plant in Kehl © Reuters/Vincent Kessler FILE PHOTO: A technician works at the Badische Stahlwerke (BSW) steel plant in Kehl

"This will most likely put a further strain on the development of German exports and industrial production."

While domestic developments have cushioned the economic blow thanks to record-high employment, inflation-busting wage rises and low borrowing costs, the heightened tensions between Washington and Beijing have raised fears in financial markets that the trade row will not end anytime soon.

Data on Friday showed that momentum in German exports slowed in the first half of the year and reversed in June, and figures earlier last week revealed a 1.5% fall in industrial output in May.

A Reuters poll of analysts predicts figures released on Wednesday will show a 0.1% second quarter economic contraction. The government expects the economy to grow just 0.5% this year.

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