Drop in German ZEW adds to signs of slowdown

October's German ZEW survey confirms that concerns over the global environment and the scandal at Volkswagen are taking a toll on investor confidence, which might affect economic activity in the months ahead. The drop in the main economic sentiment indicator, from September's +12.1 to +1.9, was much sharper than the consensus forecast of a dip to +6.8. The fact that the index is now only just above zero means that only a small majority of investors see economic conditions improving in the next six months.

The current conditions index also fell quite sharply, from +67.5 to +55.2. Admittedly, it is still far above the long-run average of -15.6. But the decline mirrors the softness of the latest industrial production and trade data and is a warning that Germany's economic cycle may already have passed its peak. In all, the survey supports the view that German growth is likely to slow in the coming months.

"We expect GDP growth of around 1.5% this year to be followed by a slowdown to 1.2% next year. This would be considerably weaker than the Government's new forecasts, which are reportedly 1.7% and 1.8% respectively", says Capital Economics in a research note.