German investor morale tumbles as trade war worries grow

By Joseph Nasr and Rene Wagner

BERLIN (Reuters) - German investor morale plunged to its lowest level in more than five years in April on growing fears of a trade war with the United States that would hurt exporters and damage an economy which already shows signs of weakening.

The ZEW research institute's index of economic sentiment among investors, published on Tuesday, dropped more than 13 points on the month, its sharpest decline since July 2016.

April's reading of -8.2 -- down from 5.1 in March -- was the lowest since November 2012 and marked the third monthly fall in a row. A Reuters poll had forecast a fall to -1.0.

"The reasons for this downturn in expectations can mainly be found in the international trade conflict with the United States and the current situation in the Syrian war," ZEW President Achim Wambach said.

"The significant decline in production, exports and retail sales in Germany in the first quarter of 2018 is also having a negative effect."

A separate gauge measuring investor assessment of the economy's current conditions edged down to 87.9 from 90.7 last month, falling just short of the Reuters consensus forecast for a reading of 88.0.

Analysts said the convergence of weak economic data in the first two months of the year and the plunging ZEW could signal weaker growth in Germany although a recession was unlikely.

"Nothing is as bad as it looks," said Thomas Gitzel of VP Bank. "The growth momentum may ease in coming quarters but a significant economic downturn is not to be feared."

Germany's leading economic institutes appear to share this view. Sources told Reuters on Tuesday they plan to raise their growth forecast for Europe's largest economy to 2.2 percent this year from 2 percent previously.

'END OF EURO-PHORIA'

But the prospect that a trade dispute between the United States and China could escalate is creating uncertainty for export champion Germany and the wider euro zone, where a strengthening currency is already hurting growth.

A Reuters poll of economists published on Tuesday found that the trade dispute between the world's two largest economies was likely to be a further drag on the euro zone's expansion.

After U.S. President Donald Trump imposed tariffs on imports of steel and aluminium last month, German Finance Minister Olaf Scholz said on Tuesday that the European Union must continue to act calmly and stick to its free trade principles.

A WTO filing on Monday showed the EU is seeking compensation from the United States for the tariffs, as China has also done.

Weak data in Germany and the euro zone could threaten the European Central Bank's plan to end its asset purchases programme this year and hike interest rates in 2019.

Carsten Brzeski of ING Diba said the steep decline in morale was a sign that investors were taking note of the stuttering German data but there was "no reason to get overly concerned".

But only a strong rebound in March's data would prevent an unexpectedly weak first quarter, he added.

"As much as the end of last year was about overshooting and too much euro-phoria, recent data could be the result of undershooting," Brzeski wrote in a note to clients.

"The truth is somewhere in the middle. Still, the current convergence of soft and hard data is not a convergence ECB officials like to see."

(Writing by Joseph Nasr; Editing by Catherine Evans)