Mideast crisis hits German investor confidence

18th July 2006, Comments 0 comments

18 July 2006, BERLIN - German investor confidence plunged in July, a key indicator released Tuesday showed, as fears grew that the Middle East crisis could push oil prices to fresh highs, hitting global economic growth. Compiled by the Mannheim-based Centre for European Economic Research, the so-called ZEW index plummeted by a bigger-than-forecast 22.7 points to 15.1 points with the prospects of an increase in consumption tax and health charges also hanging over Europe's biggest economy. This month's fall

18 July 2006

BERLIN - German investor confidence plunged in July, a key indicator released Tuesday showed, as fears grew that the Middle East crisis could push oil prices to fresh highs, hitting global economic growth.

Compiled by the Mannheim-based Centre for European Economic Research, the so-called ZEW index plummeted by a bigger-than-forecast 22.7 points to 15.1 points with the prospects of an increase in consumption tax and health charges also hanging over Europe's biggest economy.

This month's fall in the ZEW indicator followed the index's 12.2 points slump to 37.8 points in June. The fall in July took the index well below its historical average of 35.2 points.

Analysts were expecting the index to come in at 35 points this month with the turmoil in the Middle East helping to drive the ZEW indicator down for the sixth consecutive month in July.

"The future development of the German economy is subject to considerable risks," the ZEW said releasing the statement.

In particular, the ZEW pointed to the negative impact on business expectations of skyrocketing oil prices and the threat posed to exports by an economic slowdown in the US as well as the recent rise in the euro.

But with the dollar perceived as safe haven currency, the euro has over the last week edged down against the greenback as the tensions in the Middle East have escalated. The euro was trading at $1.25 at lunchtime Tuesday.

This also comes in the wake of concerns about the threat posed to global economic growth by the push by the world's leading central banks to hike up rates in a bid to contain inflationary risks triggered by surging oil prices.

The European Central Bank is expected to step up the pace of rate hikes next month by delivering its fourth increase in borrowing costs since December.

After pulling back from a new record on Monday, oil prices began to climb again Thursday edging up 0.5 per cent to $75.70 in morning trading in Europe.

With fears growing that the Mideast was on the brink of a new war and worries about the outlook for the world economy, share prices came under renewed pressure Tuesday. The broad index of European stocks EuroStoxx 50 was down 0.3 per cent in early trading.

But the ZEW also believes that the policies of Chancellor Angela Merkel's government have helped to undercut the economic sentiment in the nation.

Berlin plans to hike both consumption tax and health insurance charges in January next year with further tax rises likely to help prop up the deficit-hit health service.

"The renewed decline of the indicator is a strong signal that the government's reform policy has not met expectations so far," said ZEW president Wolfgang Franz.

"Altogether, the citizens are forced to take on a higher burden without any success in reforms being visible or realized. The hope remains that the government's failure to efficiently carry out reforms will not negatively affect the investment climate," he said.

Based on a survey of 293 analysts and institutional investors, the ZEW index, which measures sentiment six months down the track, is considered to be a curtain-raiser for the release later this month of Germany's closely watched ifo business confidence index.

However, the ZEW said strong industrial production in Germany meant that those responding to the survey were positive about the current state of the nation's economy. The indicator gauging current business conditions rose 11.9 points to 23.3 points in July.

A similar picture emerged for the 12-member eurozone. While economic expectations for the eurozone declined by 19.2 points and now stands at 18.1 points, indicator measuring current economic conditions jumped by 10.4 points to 25.9 points.

DPA

Subject: German news

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