The European Union is facing economic challenges characterized by sluggish consumer spending and persistent inflation, leading to two consecutive quarters of contraction. As a result, the eurozone has entered a recession during the winter months, and prospects for robust growth this year are limited.

Investor sentiment regarding Germany’s economic climate has deteriorated at the fastest rate since the onset of the pandemic three years ago, according to a widely observed survey. Weak manufacturing output, sluggish consumer spending, and poor export growth, coupled with high inflation and rising borrowing costs, have contributed to Germany’s economic contraction over the past two quarters.

While there has been a slight improvement in investor morale in June, highlighting the recession in Germany is likely to be a mild one, economists caution that a significant turnaround is not on the immediate horizon.

The ZEW economic research institute’s economic sentiment index, though slightly better at -8.5% in June compared to -10.7% in May, has remained in negative territory. This improvement follows three consecutive months of declines and coincides with Germany’s ongoing struggle to overcome persistent economic challenges, despite successfully managing a feared energy crisis in the winter. Additionally, the ZEW’s current conditions index dropped to -56.5 points in June from -34.8 in the previous month.

According to Achim Wambach, President of ZEW, experts do not foresee an improvement in the economic situation during the second half of the year, as export-oriented sectors continue to grapple with the impact of a weakened global economy. Nevertheless, the current recession is not seen as particularly alarming.

The European Central Bank is highly likely to raise interest rates on Thursday, with another increase expected in July. These actions will further hinder economic growth and potentially keep the eurozone’s expansion below its full potential for the foreseeable future.

Source: Tradingview

Despite the current macro backdrop, the German stock market edged higher, reaching a new record high of 16,337 on Wednesday, as investors processed UK growth data ahead of the conclusion of the Federal Reserve’s latest policy-setting meeting.

A large bearish divergence has formed on the daily chart throughout November 2022 and June 2023 showing that internal momentum conditions are deteriorating, and raising questions about the sustainability of the current bull market. Given the proximity to a previous key resistance and the weakening momentum, further upside from here is likely to be limited in the near-term.

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