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German ZEW points to recession risk

September’s drop in the German ZEW index is another sign that the economy is suffering from slowing global demand growth and troubles in the euro-zone’s periphery. The fall in the headline business sentiment indicator, which measures investors’ expectations for the economy in six months’ time, from -37.6 to –43.3, was sharper than had been expected (consensus -40.0). The index is now at its lowest level since December 2008 and broadly consistent with German annual GDP growth dropping from Q2’s 2.7% to about -1%. Admittedly, this survey has never been a great predictor of the severity of economic downturns (or the strength of upturns), perhaps because it is over-influenced by developments in financial markets. However, it has been a good guide to the timing of turning points and clearly suggests that the recovery is long gone, whilst the more reliable business surveys have turned down more recently too.