German investor confidence drops sharply in May

16th May 2006, Comments 0 comments

16 May 2006, BERLIN - German investor confidence dropped sharply in May as a surging euro and higher oil prices raised worries about the outlook for growth in Europe's biggest economy, a key indicator released Tuesday showed.

16 May 2006

BERLIN - German investor confidence dropped sharply in May as a surging euro and higher oil prices raised worries about the outlook for growth in Europe's biggest economy, a key indicator released Tuesday showed.

Compiled by the Mannheim-based Centre for European Economic Research, the so-called ZEW index plummeted down to 50.0 points in May after falling back to 62.7 points in April. The index stood at a high of 71 points in January.

Analysts had predicted the index would drop to 60 points in May. The 12.7 drop in the May ZEW represented the index's fourth consecutive monthly fall.

Coming as the German government prepares to introduce a hefty rise in the nation's consumption tax in January, the ZEW also said the fall in the index was because "the premature trust placed in the German government seems to be diminishing."

"The disillusion that set in within the last months seems to have continued," said ZEW president Wolfgang Franz when releasing the institute's latest survey.

"Debates on tax increases and minimum wages are not appropriate to raise investor confidence. The reform pressure is increasing," he said.

Since taking office last November, German Chancellor Angela Merkel's grand coalition government has come under fire for failing to press ahead with economic reforms, in particular in the labour market.

The planned raising of valued added tax (VAT) from 16 per cent to 19 per cent from January 1, 2007 is expected to fuel a mini-boom late this year as consumers rush to purchase major items such as cars and homes.

But there are fears consumer spending will then slump in 2007 and as a result drag down next year's economic growth rate.

Apart from oil prices teetering at record levels, the final days of assembling responses for the ZEW survey were also held against the backdrop of a shakeout in Europe stock markets as concerns also set in about the prospects of rising interest rates.

European stocks managed to regain some composure on Tuesday with the Eurostoxx 50 index edging up by a marginal 0.2 per cent in early trading.

The euro was hovering around 1.2810 dollars following the release of the latest ZEW survey. The common currency has gained about 8 per cent against the greenback since the start of the year.

Based on a survey of 314 analysts and institutional investors, the ZEW index is considered to be a curtain-raiser for the release next week of Germany's closely watched ifo business confidence index.

Despite signs of concern about the state of the German economy six months down the track, the analysts and investors responding to the ZEW survey were more more positive about Germany's current economic situation. The corresponding indicator rose from 2.9 points in April to 8.7 points in May.

A similar picture emerged for the 12-member eurozone. While economic expectations for the eurozone have also worsened, the ZEW index measuring the current economic situation rose four points to 18.3 points.

The indicator measuring expectations decreased by 11.0 points and now stands at 47.7 points.

Despite projections that the German economy could grow at up to 2 per cent this year - more than twice last year's level - and a string of upbeat quarterly results from corporate Germany, the nation's economic data has begun to fuel concerns among economists.

The German economy grew by a less-than-forecast 0.4 per cent in the first quarter compared to the final three months of 2005, while industrial production chalked up a surprise fall in March, in part reflecting the country's protracted cold winter weather.

Retail sales also failed to lend support to the optimism which has emerged in the nation's consumer confidence surveys. Retail sales have dropped in both February and March.

DPA

Subject: German news

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