German investor confidence falls

20 January 2004

BERLIN – German investor confidence fell for the first time in three months, an influential economic indicator released Tuesday showed, pointing to concerns that a surging euro could set back recovery in Europe’s biggest economy.

Compiled by the Mannheim-based Centre for European Economic Research, the so-called ZEW index dropped to 72.9 points after charging ahead to 73.4 points in December.

This was lower than economists consensus forecasts which had expected the index to slip to 73 points in January.

But in releasing the index the ZEW said optimism had hardly changed, adding that this had been confirmed by leading business indicators with economists also noting that a dip in the ZEW index had been expected and had been relatively minor.

It (the index) remains, however, on a very high level, said Ralph Solveen, economist with Commerzbank AG, and as a result points to considerable optimism in the economic outlook.

What had been decisive for ZEW’s fall in January, Solveen said, had been the surprisingly strong euro which had fuelled concerns that the surging currency could hit German exports and consequently damage the nation’s overall economic growth rate.

Analysts also said the latest ZEW survey came in the wake of the decision by Chancellor Gerhard Schroeder to reduce his planned tax cuts to secure a majority for his package of economic reforms in the opposition-controlled upper house of the German Parliament, the Bundestag.

Based on a survey of about 300 institutional investors and analysts, the ZEW survey acts as a curtain raiser to the release later in the month of the more broadly based and closely watched German Ifo business confidence survey.

Commenting on the January index, ZEW president Wolfgang Franz said in order for the institutes index to remain at positive levels, Germany needed to press on with its reform process while steps also needed to be taken to ensure that the country’s price competitiveness did not suffer permanently as a result of the current swings on the global forex markets.

Moreover the latest ZEW report showed that Germany’s analysts and investors were considerably less pessimistic in January about the nation’s economic prospects than they were one month earlier.

Of the numbers interviewed, 78.2 percent said this month that they felt the current economic situation in Germany was bad. This compares to 85 percent in the previous month.

Economic sentiment in the 12-member eurozone also improved, rising 1.9 percent to 80.1 points in January, the ZEW reported.

The ZEW’s report came one day after Germany’s central bank, the Bundesbank added to optimism that the nation’s economy had entered the new year on a growth path by saying that the country’s gross domestic product grew a seasonally adjusted 0.25 percent in the fourth quarter of 2003 compared with the third quarter.

But the release of the ZEW index also coincided with another show of strength by the euro, with the currency chalking up its biggest gain against the dollar in several weeks after analysts said financial markets appeared to feel that a statement following a meeting of European finance ministers had not been tough enough in dealing with the euro’s rise.

At one point this week the euro fell to USD 1.23 after a string of comments by leading European Bank officials expressing concern about the euro’s rapid escalation and aimed at talking down the common currency.

But by mid-day Tuesday the euro had broken through the key USD 1.25 mark, consequently renewing the pressure on the ECB to verbally intervene again in the market or possibly to trim interest rates.

Last week the euro, which has jumped by about 20 percent against the greenback over the last 12 months, hit an all-time high of USD 1.29 with many economists predicting that the common currency will continue to move forward in the coming months.

DPA
Subject: German news