German business confidence declined last month. The Centre for European Economic Research (ZEW) Economic Sentiment indicator fell to a 20-month low in July. The index, which measures business expectations for the economy in six months’ time, has now fallen for eight months in a row.
The ZEW said that the drop in confidence is the result of “geo-political tensions. In particular, current figures on industrial production and incoming orders suggest markedly reduced investment activities on the part of German firms, against the backdrop of uncertain sales prospects. 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.”
Carsten Brzeski, an economist at the ING bank, said: “Fear has returned. Businesses are becoming increasingly pessimistic. Looking ahead, the ZEW sends a worrying signal that the growth performance in the second quarter could suddenly ‘morph’ from a one-off into an undesired trend.
“Up to now, the fall-out of the Ukraine crisis has been limited to a general return of uncertainty and a sharp drop in German exports to Russia. Obviously, a further escalation of the crisis could start to really hurt the economy.”
Meanwhile, the vice-chairman of the US Federal Reserve has warned of a possible “permanent down-shift in the potential of powerhouses such as the USA, Europe and China”.
Speaking at a conference in Sweden about the financial crisis of 2007-8, Stanley Fischer said falling rates of productivity and “labour force participation” may have fundamentally affected the USA’s ability to generate economic growth, “complicating estimates of growth, inflation, and the amount of slack in labour and product markets”.
The same thing may be happening for different reasons in Europe and China, he said.
“The global recovery has been disappointing, and long-term annual growth in the USA may now be as low as 2%. Some of that may represent temporary factors that will change, if — for example — the US housing market improves. However, it is also possible that the under-performance reflects a longer-term shift in the global economy.”