Germany's economic sentiment has seen a dramatic decline in August, with experts warning that it could have far-reaching implications across the Eurozone.
The Economic Sentiment Index, which gauges the economic outlook for the next six months, dropped from 41.8 points in July to 19.2 points in August, missing forecasts and representing the sharpest drop since July 2022, the Leibniz Center for European Economic Research (ZEW) said in its monthly expert survey published on Tuesday.
"The economic outlook for Germany is breaking down," said ZEW President Achim Wambach. German investor morale darkened more than expected in August, posting its strongest decline in two years.
Experts noted that economic expectations are affected by a high level of uncertainty, fueled by multiple factors including disappointing business data from the U.S. economy and growing concern about the situation in the Middle East.
"The fear of a U.S. recession is clearly one of the main drivers. Let's not forget that Germany exports 10 percent of all its exports to the U.S., so clearly if the U.S. economy was to fall into recession, the German export sector, the German economy would feel it. But on top of that, comes clearly the financial market turmoil and also the renewed geopolitical risks with the current tensions and conflict between Iran and Israel," said Carsten Brzeski, chief economist at ING Germany, in an exclusive interview with CGTN.
"So it's clear that fear is back in the German economy, so all the optimism we had at the start of the year and the first months of this year have completely disappeared again," Brzeski said.
The German economy is currently stagnating. Gross domestic product shrank by 0.1 percent in the second quarter, after a growth of 0.2 percent in the first three months of the year.
Brzeski said the only thing that the government could do is to announce some structural reforms and fiscal stimulus after the summer break, but in light of the contentious 2025 budget, finding money to finance the stimulus will not be easy.
The Eurozone's economic powerhouse has been caught in "de facto stagnation" since the summer of 2018. However, many European economies are still closely intertwined with it, so a potential recession in German economy could lead to "a subdued growth trajectory" for the wider Eurozone economy, the economist warned.
"We see now in the second quarter growth, Germany in contraction, the rest of the Eurozone actually enjoying quite some decent growth. So it looked as if the rest of the Eurozone could escape this German crisis. But I think this would be very short-lived. I currently cannot see really a driver or a factor that would help the rest of the Eurozone to really decouple from Germany. For most other European economies, Germany is the main trading partner," said Brzeski.
"So if Germany was to slow down after a period of four years in de facto stagnation, the rest of the Eurozone will also feel it, which means that I think for the entire Eurozone, we will then see a rather subdued growth trajectory in the next half year, maybe in the next year," he added.
Germany's economic sentiment plunges in August as experts warn of wider woes
