German investors spooked by Greece; sentiment tanks

German investor sentiment nose-dived in May, signaling that the euro zone's largest economy is spooked by the ongoing Greek bailout drama and a lack of growth, despite the weaker euro.

The ZEW Center for European Economic Research said its economic sentiment index fell to 41.9 points in May from 53.3 in April. This was below expectations for a reading of 49 points in a poll of economists surveyed by Reuters.

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The data are a further blow for Germany, Europe's biggest economy, after poor growth data last week. Germany's economy grew by 0.3 percent in the first quarter from the previous one, down from 0.7 percent growth in the final quarter of last year.

In a statement, ZEW President, Clemens Fuest, said the poor growth figures had contributed to the decline in optimism among the financial market experts surveyed.

"Financial market experts have adjusted their optimistic expectations downward in May due to unexpectedly poor growth figures in the first quarter of 2015 and turmoil on the stock and bond markets. However, only a small number of survey participants actually expect a deterioration of the economic situation," he said.

Troubled times ahead?

It comes during a turbulent economic and political period for the 19-member euro zone.

Greece is veering towards bankruptcy, while reforms-for-aid talks with lenders drag on, and yet the region is amid a 1-trillion-euro ($1.12 trillion) bond-buying program by the European Central Bank in order to stimulate growth.

Despite this, ZEW's indicator of economic sentiment for the euro zone as a whole also decreased by 3.6 points to a reading of 61.2 points.

Greece stuck in liquidity trap: Business leader
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Although the ECB's bond-buying program causing the euro to weaken against a basket of currencies, the euro zone (and particularly export-driven Germany) has yet to see the benefits, one economist noted.

"March's euro-trade trade data revealed that the earlier depreciation of the euro had yet to boost economic activity in the region as a whole," Jennifer McKeown, senior European economist at Capital Economics, said in a note.

Against this backdrop, she said the ZEW data highlighted German investor fears over the euro zone economic outlook.

"May's fall in German ZEW investor sentiment highlights that growing fears for Greece together with recent increases in bonds yields and the euro exchange rate have damaged the economic outlook," she said in a note Tuesday.

'A bit confused'

Other economists were puzzled by the data, remarking that it showed German investors were "a bit confused."

"The positive trends of the first months of the year have been (partly) reversed over the last four weeks," Carsten Brzeski, chief economist at ING Germany, said in a note Tuesday, highlighting that the euro had strengthened, oil prices had increased and government bond yields had more than quadrupled.

But he added that there were very few arguments in favour of taking a more negative approach towards to country.

"In fact, even if the external tailwinds have subsided somewhat, they are still there," Brzeski said. "Just to put latest developments into perspective: compared with their average value of the last 12 months, bond yields are currently still some 20bp (basis points) lower, the euro some 10 percent weaker and oil prices almost 30 percent cheaper. Still sufficient to give the economy a cool breezy boost."

McKeown agreed that Germany's outlook still looked relatively positive. Capital Economics forecast German gross domestic product (GDP) to rise by up to 2 percent this year, although "a renewed appreciation of the euro or further intensification of the Greek crisis would imply slower growth."