The ZEW Indicator of Economic Sentiment for Germany fell sharply in August, falling by the largest amount since 2022.

Economic expectations for the eurozone, the US and China also deteriorate markedly. As a result, especially the expectations for export-intensive German sectors decline.” The report cited “ambiguous” Eurozone monetary policy, a possible weakening of the US economy, uncertainty regarding stability in the Middle East, and volatility in asset markets as contributing to the weakness of sentiment. Meanwhile, an index of sentiment on the part of financial market participants fell at the fastest pace since 2020.

The ZEW report provides a strong argument for another interest-rate cut in September by the European Central Bank (ECB). The ECB cut rates earlier this year, but there has been uncertainty as to when it will act again. This reflects concern about persistent high inflation for services. Still, investors interpreted the latest survey results as boosting the likelihood of a rate cut. Indeed, German bond yields fell on this expectation. Moreover, investors are likely nervous by the decline in German real GDP in the second quarter. Weakness in economic activity is another reason that the ECB will likely consider another rate cut.

At a time when the Chinese economy is relatively weak, and at a time when economic relations between China and Europe are tense, it is surprising to learn that German company direct investment in China is rising sharply. This is despite efforts by the German government to discourage such investment.

The Bundesbank reports that German foreign direct investment in China roughly doubled from the first to the second quarter of this year. Much of the investment has been driven by automotive companies, eager to retain access to the growing Chinese market. Both the German government and the European Union are concerned lest EU-based companies become too dependent on their economic relationship with China. The previous dependence on Russian energy comes to mind. If relations between Europe and China deteriorate in the future, German companies in China could face a serious risk.

The acceleration of German investment in China comes at a time when investment coming from other countries is declining, especially investment from the United States. Moreover, it also comes at a time when Chinese companies are providing German companies with serious competition. Plus, some Chinese companies are investing in Europe to retain access to the EU market.