German investor confidence shrugs off Italy, Cyprus risks

19th March 2013, Comments 0 comments

Investor sentiment in Germany hit its highest level in three years this month, data showed on Tuesday, shrugging off fears, at least for now, that Italy and Cyprus could reignite Europe's debt crisis.

The widely watched investor confidence index calculated by the ZEW economic institute edged up to 48.5 points in March from 48.2 points in February. That is its highest level since April 2010.

"After three substantial increases between December 2012 and February 2013, the indicator has stabilised in March at a respectable level," said ZEW president Clemens Fuest.

"The political situation in Italy and the rescue package for Cyprus have increased the risk that the eurozone debt crisis will worsen again. This may have contributed to the fact that the indicator has not increased substantially this month," he said.

Nevertheless, the analysts quizzed by ZEW were standing by their conviction that Germany has put the worst of the crisis behind it, Fuest continued.

"The economic situation in Germany is likely to improve over the next months. As before, the eurozone debt crisis remains the biggest risk," he said.

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 jumped by 8.4 points to 13.6 points in March, its highest level since August 2012.

A frequent criticism against the ZEW index is that it can be volatile and is therefore not particularly reliable.

But analysts were reassured by the fourth consecutive monthly rise in the barometer.

"The positive contagion in financial markets continues to comfort financial analysts," said ING Belgium economist Carsten Brzeski.

"Over the last four weeks, financial conditions for the German economy have improved further," the expert noted, pointing to falling oil prices, a weakening euro and rising stock markets.

"The start to the year was still a bit jolty with retails sales and exports up but new orders down. However, the economy should gain further pace in the coming months," Brzeski said.

Capital Economics economist Jennifer McKeown was not so sure.

"March's small rise in investor sentiment leaves it at a high level, but there is a clear risk that ongoing developments in Cyprus and Italy prompt renewed falls soon," she said.

The ZEW index "has never been a reliable predictor of (economic) growth. This month's increase was the smallest since November, suggesting that the Italian political stalemate and the slightly softer tone of recent German hard data are having an effect," McKeown said.

"What's more, most responses will have been taken before the flare-up of the crisis in Cyprus, which could clearly damage sentiment regarding the financial system and economy of the eurozone as a whole.

"We suspect that sentiment will weaken in the coming months and, while Germany should continue to easily outperform the rest of the eurozone, a strong recovery seems like too much to hope for," McKeown said.

Rob Wood at Berenberg agreed.

"The volatility in recent days as a result of the Cyprus negotiations, plus the political problems in Italy, pose risks," he said.

"The ZEW index reflects the sentiment in financial markets. The Cypriot contagion risk is a serious one, and the volatility it is introducing could hit sentiment. Our best guess, however, is that the damage will be contained in the end. But we could be in for a rough ride first," Wood cautioned.

© 2013 AFP

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