German Slip in Confidence Signals Slowdown After Bumper Quarter

  • ZEW expectations index drops to 6.4 in May from 11.2
  • First-quarter GDP growth confirmed at 0.7% on investment surge

German investor confidence dropped for the first time in three months in a sign that growth momentum is set to slow after the economy expanded at its strongest pace in two years.

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 ahead, fell to 6.4 from 11.2 in April, reflecting concerns over a U.K. exit from the European Union. Economists in a Bloomberg survey predicted an increase to 12.

Earlier Tuesday, data from the Federal Statistics Office in Wiesbaden confirmed Europe’s largest economy grew 0.7 percent in the January-March period on the back of an investment surge.

“There is a feeling that the ‘good times’ are probably not here to stay,” Dominik Rehse, a researcher at ZEW, told reporters in Mannheim. Risk factors include “continued doubt over China growth, nationalist party successes in Western Europe and whether public consumption and construction will continue at the current pace,” he said.

The Bundesbank predicts that growth will slow somewhat in the current quarter, even though it expressed confidence that the country’s economy can retain its underlying strength. Record-low unemployment is underpinning consumer demand and companies are benefiting from a cyclical recovery in the 19-nation euro area driven by European Central Bank stimulus.

Construction Surge

In the first quarter, German growth was driven by a 2.3 percent jump in construction that pushed up capital investment by 1.8 percent, the Federal Statistics Office in Wiesbaden said on Tuesday. Private consumption rose 0.4 percent.

Investment contributed 0.4 percentage point to growth in the first quarter, with consumer spending adding 0.2 point and government consumption 0.1 point, according to the report. Net trade subtracted 0.1 percentage point from GDP expansion as imports outpaced exports.

“Growth was broad-based, with private consumption and construction investment shouldering a great share,” Johannes Gareis, an economist at Natixis in Frankfurt, said before the report. “Looking to second-quarter growth, we think the German economy is unlikely to repeat the blockbuster performance seen in the first quarter, also due to some payback from the boost to construction investment from mild weather.”

Business Climate

The Ifo institute’s business-climate index due on Wednesday will provide some clues on the severity of the slowdown. A survey of purchasing managers sent mixed messages on Monday, suggesting private-sector growth in Europe’s largest economy accelerated in May at the fastest pace this year as companies worked through their backlogs, while a gauge measuring new orders fell to the lowest level in 10 months.

ZEW’s gauge of current conditions in Germany rose to 53.1 from from 47.7, more than analysts expected. A gauge of confidence in the euro-area economy fell to 16.8 from 21.5.

“The strong growth of the German economy in the first quarter of 2016 appears to have surprised the financial market experts,” ZEW President Achim Wambach said in a statement. “However, they seem not to expect the economic situation to improve at the same pace going forward. Uncertainties regarding developments such as a possible Brexit currently inhibit a more optimistic outlook.”

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