German analyst and investor morale sank in June at its fastest rate since October 1998 on worries about the health of the Spanish banking sector and uncertainty over the Greek election outcome, a survey showed on Tuesday.
The main reading from the ZEW think tank’s monthly poll of economic sentiment fell to -16.9, undershooting even the weakest forecast in a Reuters poll of 42 economists. The data adds to signs that Germany, Europe’s paymaster and growth engine, is beginning to feel the bloc’s pain.
The figure plunged from 10.8 in May and came in way below the central forecast of a drop to 4.0, sending the euro lower against the dollar and weighing on European stocks.
“This is a hefty decline. This is an indication that the worsening of the debt crisis and the increasing tensions in Spain are impacting Germany,” said Juergen Michels of Citigroup. “That should strengthen the ECB in its decision to reduce rates in June,” he added.
ZEW economist Michael Schroeder said the number of survey participants who expect the ECB to slash interest rates in the next half year had risen but they were still in the minority. The disappointing figures come after data showed business morale in France, the euro zone’s second largest economy, also slipped in June, putting a dampener on the region’s prospects.
“It has really come as a surprise to me that it is such a huge decline,” ZEW’s Schroeder said. “This is not just monthly fluctuation, this is really too big a change to be interpreted as that.”
He added that falling exports and slowing growth in Europe and Asia had contributed to the decline.
“The financial market experts’ expectations are a strong warning against a too-optimistic assessment of Germany’s economic perspectives in the remainder of this year,” said ZEW President Wolfgang Franz.
“The risks of a pronounced decline in economic activity in countries with close trade ties to Germany are very clear,” Franz added.
He described the situation in the euro zone as “precarious”, even after Greeks voted narrowly for parties supporting the terms of its bailout programme, saving the country from bankruptcy and a potential exit from the euro.