German economic sentiment drops to 21-month low as tariff fears linger
Germany's economic sentiment has taken a sharp downturn in April, reaching its lowest level in nearly two years, as concerns over US trade policy under Donald Trump cast a shadow over business confidence.
According to the latest ZEW Economic Sentiment survey, the indicator collapsed to -14 points, down from 51.6 in March, marking the weakest reading since July 2023. The figure missed expectations by a wide margin, with economists having forecast a more modest decline to 9.5.
ZEW described the drop as the steepest monthly decline since March 2022, when sentiment plummeted in the immediate aftermath of Russia's full-scale invasion of Ukraine. At that time, the indicator fell from 54.3 to -39.3 points.
For the eurozone, sentiment followed a similarly bleak trajectory, dropping to -18.5 points in April from 39.8 in March, far below forecasts of 14.2. This represents the lowest euro area reading since December 2022.
'The erratic changes in the US trade policy are weighing heavily on expectations in Germany, which have sharply declined. It is not only the consequences the announced reciprocal tariffs may have on global trade, but also the dynamics of their changes, that have massively increased global uncertainty,' ZEW President, Achim Wambach, PhD, said.
He added that this heightened unpredictability is directly reflected in both German and eurozone economic expectations.
Particularly affected by the sharp deterioration are Germany's export-heavy industries, including the automobile, chemical, metal, steel, and mechanical engineering sectors, which had recently been showing signs of recovery.
Still, despite the worsening sentiment, financial market experts do not currently perceive a significant risk of a new inflation spike in either Germany or the broader eurozone. This, according to the ZEW, provides the European Central Bank (ECB) with potential room to support the economy through further interest rate cuts.
European stock markets rose on Tuesday despite the dismal ZEW figures, supported by diminished concerns over Trump's tariff plans following his recent concession on Chinese imports and expectations of an ECB rate cut on Thursday.
The German DAX index led gains, rising 1.6% to 21,279 by 11:20 CEST, outperforming other European benchmarks. Rheinmetall topped the index with a 3.6% gain, followed by Vonovia (+3.4%) and BMW (+3%). Volkswagen and Mercedes-Benz also rose, up 2.5% and 2.4%, respectively.
Elsewhere in Europe, the CAC 40 in France and the Euro STOXX 50 each gained 0.8%, underperforming Germany amid weakness in the luxury sector. Shares in LVMH fell 7.1% after reporting a 3% decline in Q1 sales, worse than expected. Kering and L'Oréal followed suit, down 2.1% and 1.3%, respectively.
In southern Europe, Italy's FTSE MIB added 0.9%, and Spain's IBEX 35 rose 1.2%, led by banking and industrial stocks. Spanish banks Banco Santander, Unicaja Banco, and Caixabank climbed between 2.2% and 2.7%. In Italy, Stellantis rose 4.5%, Leonardo gained 3%, and Pirelli advanced 2.7%.
The euro remained stable at $1.1340, while German Bund yields were unchanged at 2.50%, as investors awaited signals from the ECB's upcoming monetary policy meeting.
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