By Geoffrey Smith
Investing.com -- Expectations for Europe's largest economy collapsed to the lowest level in eleven years in July as the country faced the prospect of a winter of gas rationing.
The forward-looking Economic Sentiment indicator compiled by the think-tank ZEW fell to -53.8 in July from -20.8 in June, a much steeper decline than forecast. The last time it had been so low was at the depths of the euro crisis at the end of 2011.
ZEW's index measuring current conditions also fell sharply to -45.8 from -27.6.
The survey, which is compiled by professional economists rather than businesses, is the first to reflect the new reality of Russia cutting gas supplies to its largest customer as a means of exerting political pressure. It's the first time that Russia has overtly used energy as a weapon against Germany since it started shipping gas to the country back in the 1980s, and has upended decades of German thinking about energy security and energy policy.
The news was still not quite dire enough to push the EUR/USD immediately below parity against the dollar for the first time in 20 years. It traded a hair's breadth above the 1:1 level at 05:20 AM ET (0920 GMT).
"The grave current concerns about energy supply in Germany, the ECB's announcement that it will raise interest rates and the continued constraints in China caused by the corona virus are leading to a significant worsening in the economic outlook," ZEW President Achim Wambach said in a statement. He noted that expectations for energy-intensive sectors and for the key expor sector had fallen particularly sharply, "but private consumption is now also forecast to be considerably weaker."
Parts of Germany's energy sector are already close to collapsing under the strain. Utility Uniper (ETR:UN01) is in talks for a government bailout worth an estimated 9 billion euros, having had to cover its lost Russian gas supply on the global spot market at levels that are 10 times higher than where they were only 15 months ago. Chemicals giant BASF (ETR:BASFN), Europe's largest industrial gas buyer, said late on Monday it still expects a downturn in the second half despite posting surprlsingly strong results for the second quarter.