German investor confidence slides as debt crisis bites

18th October 2011, Comments 0 comments

Evidence that the eurozone debt crisis is beginning to hurt the German economy sent investor confidence in Europe's largest economy to a three-year low, data showed on Tuesday.

The ZEW economic think-tank said in a statement that its closely watched economic expectations index fell by 5.0 points to stand at minus 48.3 points in October, its lowest level since November 2008.

The index had already shed 5.7 points the previous month and it was the eighth month in a row that the indicator has fallen.

The decline was also steeper than expected: analysts polled by Dow Jones Newswires had been pencilling in a reading of minus 45 points for October.

"Weak economic data in Germany have contributed to the decline in economic expectations," ZEW chief Wolfgang Franz explained in a statement.

"Falling retail sales and industrial orders are confirming experts' fears that the smouldering debt crisis is causing German companies and consumers to postpone their investment and spending plans," Franz said.

A sub-index, measuring experts' assessments of the current economic situation, fell for the third month in a row, shedding 5.2 points to 38.4 points.

The ZEW index is the only barometer of investor confidence in Germany and this month's reading was based on responses from 271 analysts.

A frequent criticism against it is that the index can be volatile and is therefore not a particularly reliable indicator for forecasting the depths of any economic downturn.

Other business confidence indices, such as the purchasing managers' index or the all-important Ifo survey, which is based on as many as 7,000 responses in the real economy, are seen as more accurate indicators.

For Christian Schulz, senior economist at Berenberg Bank, the persistent deterioration in the ZEW index is nevertheless "consistent with a recession in Germany and in the eurozone in the fourth quarter of 2011 and the first quarter of 2012.

"Unless a solution to the crisis is found, confidence is unlikely to return quickly and the recession may become deeper and more protracted," Schulz said.

Ben May, European economist at Capital Economics in London, saw the latest drop in the ZEW as "further evidence that Germany is being hit hard by deteriorating export prospects and the eurozone debt crisis."

The survey "has never been a great predictor of the severity of economic downturns or the strength of upturns, but on the face of it the index is broadly consistent with annual gross domestic product (GDP) growth dropping from 2.7 percent in the second quarter to about minus 1.0 percent," May said.

By contrast, Heinrich Bayer at Postbank Research believed that "the current dip in growth need not necessarily lead to a recession. Recent months in particular have shown that sentiment is worse than the actual situation," he said.

© 2011 AFP

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