The ZEW index, which shows how 350 financial and economic analysts view the Eurozone, dropped in March to -8.5 from 39.4 in February.
The index measures the difference between the percentage of analysts who are optimistic and those who are pessimistic about the economic outlook for the next few months.
March's negative reading shows more analysts now expect deterioration, reversing February's optimism.
Energy shock and geopolitical tensions explain the change
Such an abrupt shift in sentiment is explained by the war in Iran, which has driven energy prices to elevated levels. Higher energy costs directly weigh on energy-intensive industries and reduce household purchasing power.
The longer oil and gas prices remain high, the more likely it is that this energy shock will spread through the economy, potentially triggering renewed broad-based price increases.
The Eurozone, which remains highly dependent on external energy sources, is particularly vulnerable to supply disruptions and price spikes. The Middle East’s crisis, therefore, represents a negative development that undermines European economic growth.
Even in the unlikely event that hostilities were to stop immediately, the war in Iran has already weakened the Eurozone’s economic outlook. Should the conflict persist, a European recession cannot be ruled out.
We’re avoiding European equities
Given high short-term uncertainty and structural medium-term limits, we avoid Eurozone equities in our strategy. Certain European firms may still offer selective opportunities.