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(Bloomberg) — German investor optimism worsened far more than expected as the war in Iran tempers hopes that Europe’s largest economy is on the cusp of a strong revival.
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An expectations index by the ZEW institute decreased to -0.5 in March from 58.3 in February. That’s below all estimates in a Bloomberg survey, which had foreseen a reading of 39.2, and is the least since Donald Trump first unveiled his tariffs last April.
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A measure of current conditions surprisingly improved.
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“The escalation in the Middle East spikes energy prices and increases inflationary pressure,” ZEW President Achim Wambach said Tuesday in a statement. “This heightens the risk for the German economy that the emerging trend of economic recovery will slow down. How strong these effects will turn out depends on the intensity and the duration of the conflict.”
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German bonds extended their gains, lowering 10-year yields as much as three basis points to 2.92%. Traders also trimmed wagers on interest-rate hikes, with swaps implying around 39 basis points of monetary-policy tightening by year-end.
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The Iran conflict and resulting surge in oil and gas costs has raised fears that Germany’s nascent recovery may be derailed even as the country benefits from hundreds of billions of euros of spending on infrastructure and defense. Deutsche Bank last week cut its 2026 growth forecast to 1% from 1.5%.
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The data arrive on the eve of the European Central Bank’s two-day rate meeting, where officials will try to assess the impact on euro-area growth and inflation from Iran. They have, however, signaled it’s too early to draw definite conclusions.
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Even before the war, Germany’s economy had a rather weak start to the year, with industrial production, factory orders, exports and retail sales all missing expectations. There was better news in February as business surveys suggested the manufacturing sector expanded for the first time since 2022.
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In 2025, Germany eked out growth of just 0.2%, following two years of contraction — a pace Chancellor Friedrich Merz deemed “unsatisfactory.”
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—With assistance from Joel Rinneby, Harumi Ichikura, Kristian Siedenburg and James Hirai.
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(Updates with markets in fifth paragraph.)
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English (US)