The investor confidence index calculated by the ZEW economic institute plunged by a bigger-than-expected 26 points to minus 6.8 points in July, its lowest level since November 2012, the think tank said in a statement.
“The Brexit vote has surprised the majority of financial market experts. Uncertainty about the vote's consequences for the German economy is largely responsible for the substantial decline in economic sentiment,” said ZEW president Achim Wambach.
“In particular, concerns about the export prospects and the stability of the European banking and financial system are likely to be a burden on the economic outlook,” he said.
In a seismic vote on June 23, 52 percent of Britons voted to leave the EU.
For the survey, ZEW questions analysts and institutional investors about their current assessment of the economic situation in Germany, as well as their expectations for the coming months.
The sub-index measuring financial market players' view of the current economic situation in Germany decreased by 4.7 points to 49.8 points in July, ZEW said.
'Cause for concern'
Berenberg Bank economist Florian Hense said that while monthly data are volatile, this month's reading was important because it was first since June 23 and it contrasted with market developments.
When the European Central Bank's governing council convenes on Thursday, it would “acknowledge that market moves so far have been relatively orderly and sovereign bond yields, particularly in the eurozone periphery, signal limited contagion risk. But today's soft data will be some cause for concern,” Hense said.
“Brexit is the key risk to our modestly positive outlook for the eurozone,” the expert said.
BayernLB economist Stefan Kipar agreed.
Nevertheless, “there is no cause for panic. Despite Brexit, we're not expecting a recession for the euro area or for Germany,” he insisted.
The July ZEW reading “suggests that investors are more worried about the effects of Brexit on the German economy than the financial market response implies,” said Capital Economics economist Jennifer McKeown.
“The index is now at its lowest level since November 2012, when Germany was in recession. And the fact that it is below zero means that most investors expect economic conditions to deteriorate over the next six months.”