Japan, Mideast unrest hit German confidence: ZEW

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The devastating earthquake and nuclear crisis in Japan, as well as the ongoing crisis in Libya, have hit German investor confidence, the closely watched ZEW index showed Tuesday.

The monthly survey of investors in Europe's top economy fell 6.5 points to 7.6 points in April. This was worse than analysts polled by Dow Jones had expected. They forecast a reading of 10 points.

"Two factors may have contributed to this decline. On the one hand, the current boom doesn't leave much room for a further improvement of the current economic situation," said the institute in a statement.

"On the other hand, experts are more and more aware of the risks for the world economy resulting from the events in Japan and in the Arab world," the ZEW added.

The index is now some way below its historical average of 26.6 points.

The economic institute's president Wolfgang Franz said that rising oil prices could force the European Central Bank to increase interest rates further, which might in turn further dampen sentiment.

"Despite the positive economic development, considerable risks may result from increasing commodity prices," said Franz.

"These price increases could lead to second-round effects that could then force the European Central Bank to adopt a more restrictive monetary policy," added the president.

On Thursday, the European Central Bank raised interest rates from record lows for the first time since mid-2008, as concerns about inflation outweighed worries over the ongoing eurozone debt crisis.

Nevertheless, the central bank's president, Jean-Claude Trichet, allayed fears that the bank was about to embark on a rate hiking cycle, saying only they would do whatever was necessary to keep rising prices in check.

The survey came as the German government prepares to revise up its growth forecast for this year from the current level of 2.3 percent. Economy Minister Rainer Bruederle has already indicated output will be stronger than expected.

On Monday, the International Monetary Fund lifted its projection for this year to 2.5 percent.

But natural disasters, geopolitical uncertainty and the spectre of higher borrowing costs have hit business confidence.

The survey by the Ifo institute fell last month for the first time since May.

© 2011 AFP

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