German ZEW highlights risks to the recovery

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.

The decline in the headline expectations index, from +53.3 to +41.9 - the lowest since December - was the second in a row. It followed falls in the German Composite PMI and EC Economic Sentiment Indicators in April. 

The fall in the ZEW was sharper than the consensus expectation of a dip to 49.0.
Admittedly, the index is still easily in positive territory, meaning that most respondents see German economic conditions improving in the next six months. And on past form, the loose relationship between the ZEW and annual German GDP growth points to a renewed pick-up in the latter from Q1's 1.0% to about 1.5%. 

According to Capital Economics, German GDP seems to rising by up to 2% this year, but a renewed appreciation of the euro or further intensification of the Greek crisis would imply slower growth. 
Elsewhere, 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. 

While export values rose by 1.7% on the month, imports rose by 3.9%, leading the trade surplus to narrow to €19.7bn. This confirms that Q1's 0.4% rise in 
euro-zone GDP was driven by domestic demand rather than net trade.