The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, dropped to 8.6 in August from 27.1 in July. Economists forecast a decrease to 17, according to the median of 31 estimates in a Bloomberg News survey. This was the eighth consecutive monthly decline and the biggest in more than two years.
A worsening standoff between Russia and the European Union is clouding the outlook for a German economy that probably contracted for the first time since 2012 in the second quarter. The disruption to trade threatens to weigh on the revival in the 18-nation euro area, which has already seen Italy slip back into recession.
“The drop in the ZEW index confirms the near-term downside risk for the German and euro-zone economies emanating from the Ukraine crisis,” said Christian Schulz, senior European economist at Berenberg Bank in London. “The ‘Putin factor’ could lead to more cautious investment plans for a while.”
The euro slid after the report, and traded at $1.3342 at 12:29 p.m. Frankfurt time. The DAX Index (DAX) of German stocks was down 0.3 percent at 9,156, taking its decline to almost 9 percent since it closed at a record on July 3.
Germany’s economy probably shrank 0.1 percent last quarter, according to a Bloomberg News survey. While that’s largely a consequence of a warm winter that pulled production into the first quarter, when gross domestic product rose 0.8 percent, events in eastern Europe threaten to slow activity in coming months. The Bundesbank predicted in June that German growth will be 1.9 percent this year.
“The decline in economic sentiment is likely connected to the ongoing geopolitical tensions that have affected the German economy,” ZEW said in a statement. “Since the economy in the euro zone is not gaining momentum either, the signs are that economic growth in Germany will be weaker in 2014 than expected.”
The European Union agreed last month to curb Russia’s access to bank financing and advanced technology in its widest-ranging sanctions yet.
Dusseldorf-based Rheinmetall AG reduced its 2014 profit forecast after the German government blocked a contract to build a military training center east of Moscow. Fraport AG, the operator of Frankfurt’s airport, cut its retail outlook after the number of Russians departing Europe’s third-busiest hub fell 3.8 percent in the first half.
German second-quarter GDP data will be published on Aug. 14 along with figures for the euro area. The currency bloc’s economy probably expanded 0.1 percent in the three months through June, down from 0.2 percent in the previous period, according to a separate survey. Figures last week showed that Italy, the region’s third-biggest economy, posted a second straight quarter of contraction.
European Central Bank President Mario Draghi said last week that “heightened” political risks could affect the region’s recovery. He spoke after policy makers left the bank’s benchmark interest rate unchanged at a record low of 0.15 percent and kept the deposit rate at minus 0.1 percent. The ECB announced an unprecedented package of stimulus measures in June that will take time to work through to the real economy.
“Germany’s economic upswing stands on shakier legs than was expected only a short while ago,” said Heinrich Bayer, an economist at Postbank AG in Bonn. “But as long as the current geopolitical tensions don’t escalate further, we still assume the German economy will develop positively in the near future.”
Much of eastern Europe will probably report slower economic growth for the second quarter. Poland’s economy expanded 0.5 percent from the first quarter, down from 1.1 percent in the previous period, according to the median estimate in a Bloomberg survey. Growth probably also cooled in Hungary and the Czech Republic. The nations, along with Romania, Bulgaria and Slovakia, will report GDP data on Aug. 14.