German confidence plunges to 5-year low (FT)

German investor confidence has plunged this month to its lowest level for five years, suggesting that the recent strength of Europe’s largest economy might soon wane.

The Mannheim-based ZEW economic institute said that the unexpectedly steep decline in its economic sentiment index, by 20.7 points to minus 5.6 points in August, signalled “a considerable economic downturn within the next six months”.

The index has now fallen for seven consecutive months and was last lower in June 2001.

Although the ZEW index is regarded as volatile, its sharp drop removed the euphoria after last week’s gross domestic product figures. They showed the German economy grew faster than the US in the second quarter – and at the highest rate for five years.

The ZEW figures added to fears that Germany will see a significant economic slowdown next year. “Dark clouds will appear on the horizon,” said Wolfgang Franz, the institute’s president.
If confirmed by other data, such as the Munich-based Ifo business climate index released on Thursday, the latest fall may call into question further interest rate increases planned by the European Central Bank.

Prior to the August ZEW data, economists had expected the ECB’s main rate to rise by a further quarter percentage point to 3.25 per cent in October.

Forecasts that German economic fortunes are turning appeared to be supported by details of the survey. While gloom about the outlook in coming months intensified, investors’ assessment of the current economic situation improved this month to the highest level since November 2000. That concern about the future could also be reflected in a further fall in the Ifo index, economists said, extending July’s modest decline.

German investor sentiment in the past few weeks had been hit by fears that a slowing US economy a stronger euro will dampen German exports, ZEW said. There was also concern about corporate tax changes planned by Berlin and the impact on private consumption of high oil prices, and a three percentage point hike in VAT from next year.

Andreas Rees, economist at HVB bank in Munich, said the ZEW was a gauge of likely business conditions six months ahead. “Inevitably the outcome is bleak right now as a double whammy is waiting for Germany at the beginning of next year. Besides the VAT hike, which will dent consumers’ purchasing power, the US slowdown will weight on companies’ export performance.” However, he thought a recession was unlikely.

Julian Callow, economist at Barclays Capital, added: “It will be hard for the ECB to be raising rates on October 5 if the next two monthly rounds of business confidence data have shown some significant deterioration – the ECB’s tendency, when confronted with such developments, has tended to be to pause and await further news.”
Copyright The Financial Times Limited 2006