Recession clouds in Germany as investor confidence slumps

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The eurozone debt crisis and concerns about a global slump sent investor confidence in Germany to a three-year low on Tuesday, fuelling fears of recession in Europe's largest economy, analysts said.

The ZEW economic think-tank said in a statement that its closely watched economic expectations index fell by 5.7 points to stand at minus 43.3 points in September, its lowest level since December 2008.

The index had already plummeted by 22.5 points the previous month and it was the seventh month in a row that the indicator has fallen.

"The smouldering debt crisis in a number of eurozone countries and fears for a renewed weakening of the global economy are behind the drop," ZEW chief Wolfgang Franz explained in a statement.

Nevertheless, the decline was not so sharp as expected: analysts polled by Dow Jones Newswires had been pencilling in a reading of minus 45 points for September.

The number "points to a recession risk," said Jennifer McKeown, senior European economist at Capital Economics in London.

The decline "is another sign that the economy is suffering from slowing global demand growth and troubles in the eurozone's periphery."

In fact, she saw the reading as "broadly consistent" with German gross domestic product growth slowing from 2.7 percent in the second quarter of this year to "about minus 1.0 percent."

The ZEW index is the only barometer of investor confidence in Germany and this month's reading was based on responses from 289 analysts. But it has not always proved particularly reliable in the past in forecasting accurately the magnitude of economic downturns or upturns.

"However, it has been a good guide to the timing of turning points and clearly suggests that the recovery is long gone," McKeown said, noting that "the more reliable business surveys have turned down more recently too."

In all, she was forecasting a slowdown in German growth from 3.0 percent this year to "as low as 0.5 percent in 2012. And as the burden of losses from the peripheral economies worsens, Germany will struggle to expand at all in 2013," the analyst said.

For Fabio Fois of Barclays Capital Research, the problem with the ZEW index is that it is "biased towards the financial sector's sentiment with around 70 percent of respondents falling within this category... (so) we think it should be taken with a pinch of salt when it draws conclusions concerning the relative state of the real business cycle in the euro area."

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 scheduled to be published later this month.

Pending the outcome of those, Commerzbank analyst Ralph Solveen also saw increased recession risks.

But Felix Eschwege at Natixis was not so pessimistic.

"We expect positive GDP growth in the third quarter, mainly driven by domestic demand. In particular we assume a rebound of private consumption and furthermore significant contributions by construction and equipment investment," the economist said, adding: "Nevertheless, uncertainty remains high."

© 2011 AFP

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