July 14 (Bloomberg) -- German investor confidence unexpectedly fell in July, suggesting the recovery in Europe’s largest economy may take longer to materialize.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months ahead, declined to 39.5 from 44.8 in June. Economists expected a gain to 47.8, the median of 36 forecasts in a Bloomberg News survey showed.

The government says gross domestic product will plunge 6 percent this year, the most since World War II, even as the economy shows signs of stabilizing after its first-half freefall. Industrial output jumped 3.7 percent in May from April, the biggest gain in almost 16 years, and business confidence increased for a third month in June. The benchmark DAX share index has advanced 30 percent in the past four months.

“We might see more disappointing ZEW data over the coming months,” said Sylvain Broyer, chief German economist at Natixis in Frankfurt. “There’s a real danger that the economy will shrink again in 2010.”

The euro fell a third of a cent after the ZEW report was published to $1.3965. ZEW’s gauge of the current economic situation rose to minus 89.3 from minus 89.7 in June. Economists expected an increase to minus 87.8.

European investor confidence fell for the first time in four months in July, according to an index published by Germany’s Sentix research institute last week.

Stimulus Measures

Chancellor Angela Merkel’s government has pledged to spend about 85 billion euros ($117 billion) in an effort to rekindle growth in Germany, including tax breaks and a 2,500-euro payment for consumers who scrap their old car and buy a new one.

The European Central Bank has cut its key interest rate to a record low of 1 percent, offered to lend banks as much cash as they want and started purchasing 60 billion euros of covered bonds to help revive lending.

Volkswagen AG’s luxury Audi division is forecasting “light” growth in auto sales next year following this year’s contraction, Peter Schwarzenbauer, the brand’s sales chief, said on July 8. HeidelbergCement AG, Germany’s biggest cement maker, said the same day it’s seeing initial signs of improvement in markets such as Asia as local stimulus packages kick in.

Delayed Recovery

“We won’t see a strong economic upswing in Germany or in Europe,” said David Kohl, deputy chief economist at Julius Baer Holding AG in Frankfurt. “We don’t expect a return to growth until the second quarter of 2010.”

Carmakers such as Volkswagen and Daimler AG won’t sustain German sales growth into 2010 as the government incentive that helped demand this year expires, Matthias Wissmann, the head of the country’s VDA car-industry association, said on July 2.

The euro-area economy will probably shrink 4.8 percent this year and 0.3 percent in 2010, the International Monetary Fund said last week.

“The good news is that the forces pulling the economy down are decreasing in intensity,” IMF Chief Economist Olivier Blanchard said on July 8. “The bad news is that the forces pulling the economy up are still weak.”

To contact the reporter on this story: Christian Vits in Frankfurt cvits@bloomberg.net

Last Updated: July 14, 2009 05:32 EDT