Slumping investor confidence threatens German upswing

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A sharp drop in a closely watched German economic indicator stoked fears Tuesday that the strong recovery in Europe's powerhouse will peter out as demand for its all-important exports weakens.

The ZEW institute's sentiment indicator, based on a survey of 284 analysts and institutional investors, fell 7.2 points to 14 points in August, its fourth consecutive monthly fall and a much sharper drop than feared.

Last week, data showed that German gross domestic product (GDP) surged in the second quarter at its fastest rate since reunification 20 years ago, with output soaring 2.2 percent compared to the previous three-month period.

This helped the 16-nation currency union outstrip the United States on a quarterly basis, with output rising 1.0 percent compared to 0.6 percent the other side of the Atlantic.

Exports, the backbone of the German economy, rocketed 28.5 percent year-on-year in June to reach 86.5 billion euros (111.7 billion dollars), close to pre-crisis levels.

Germany has long been lambasted for doing little to get consumers shopping but a 31.7-percent leap in imports to a record 72.4 billion euros suggested that consumer demand is also healthy.

Media reports at the weekend said that Chancellor Angela Merkel's government is now pencilling in growth of around 3.0 percent this year, more than double the previous official projection of 1.4 percent.

In 2009, the global downturn pushed Germany into its worst recession since World War II, with output contracting 4.7 percent.

But Germany appears to be in a league of its own amid increasing signs elsewhere, not least in the United States, Japan and China, that the worldwide rebound may be running out of steam.

The US Federal Reserve warned last week that the recovery in the United States, the world's biggest economy, would be "more modest" than expected, sending financial markets tumbling worldwide.

Growth in Japan in the second quarter was just 0.1 percent while manufacturing in China contracted for the first time in 16 months in July, a survey showed this month. India's industrial output also expanded at its slowest pace in 13 months in June.

"Given that economic growth worldwide is losing momentum, the euphoria about the growth rates in some industries is making financial market experts feel uneasy," ZEW chief Wolfgang Franz said.

Jennifer McKeown, European expert at Capital Economics, said the fall in the volatile ZEW index would "dent hopes that the strong recovery seen in the second quarter could continue.

"(As) global demand growth slows further and consumers remain reluctant to spend, the recovery is likely to be fairly short-lived," she said.

Unicredit economist Alexander Koch said there were no signs of an "abrupt" end to the German recovery or of a "double-dip" recession.

But he added that the "momentum of the German economy is set to moderate substantially towards the end of the year and in 2011."

© 2010 AFP

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