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Published: April 18, 2023 at 5:21 am ET

By Ed Frankl

The outlook for the German economy was unexpectedly downgraded amid uncertain financial markets amid banking sector turbulence as high inflation and rising interest rates continue to weigh on economic activity.

The ZEW Institute for Economic Research said on Tuesday that its index of economic expectations…

By Ed Frankl

The outlook for the German economy was unexpectedly downgraded amid uncertain financial markets amid banking sector turbulence as high inflation and rising interest rates continue to weigh on economic activity.

The ZEW Institute for Economic Research said Tuesday its index of German economic expectations fell to 4.1 in April from 13.0 in March, well below the 15.0 expected by economists polled by The Wall Street Journal.

The reading means that the economic situation is not expected to improve significantly over the next six months, ZEW said.

Sentiment has been hurt by expectations that banks will be more cautious in lending and that still-high inflation and restrictive international monetary policy are weighing on the economy, ZEW President Achim Wambach said.

However, the ZEW index for current economic conditions rose to 32.5 in April from minus 46.5 in March, better than economists’ expectations of minus 39.5.

According to Mr. Wambach, this comes after the threat of a sharp crisis in the international financial market, following bank failures in the United States and the takeover of Credit Suisse Group AG, appears to have been averted.

The German economy shrank by 0.4% in the fourth quarter of 2022, losing momentum as inflation weighed on consumer spending. Economists expect the economy to contract in the first three months of 2023, according to a consensus poll compiled by FactSet.

Email Ed Franklin at edward.frankl@wsj.com

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