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German Investor Sentiment May Drop as Debt Crisis Threatens to Curb Growth

German investor confidence probably fell for a second month in June on concern that the sovereign debt crisis will undermine export prospects and crimp growth in Europe’s largest economy.

The ZEW Center for European Economic Research will today say its index of investor and analyst expectations fell to 42 from 45.8 in May, according to the median of 35 forecasts in a Bloomberg News survey. ZEW releases the report, which aims to predict developments six months ahead, at 11 a.m. in Mannheim.

Greece’s near default has prompted governments from Berlin to Madrid to implement budget cuts to convince investors they can tame deficits, threatening to damp demand and hurt the region’s economic recovery. While the euro’s 15 percent drop against the dollar this year may boost exports outside the currency region, the 16-nation bloc is Germany’s most important market.

“The debt crisis will slowly impact on Germany,” said Alexander Koch, an economist at UniCredit Group in Munich. “The ZEW is forward-looking, and toward the end of the year Europe’s austerity measures will be hurting both exports and domestic demand.”

For now, Germany’s economy is showing few signs of discomfort, with the benchmark DAX share index gaining 2.9 percent last week. The unemployment rate unexpectedly fell to 7.7 percent last month as companies ramped up production and added workers to meet booming orders.

Forecasts Raised

The Bundesbank on June 11 raised its growth forecasts, predicting expansion of 1.9 percent this year and 1.4 percent in 2011, up from 1.6 percent and 1.2 percent respectively.

Continental AG, Europe’s second-biggest car-parts maker, on June 10 raised its sales-growth estimate for this year to more than 10 percent after business through May was stronger than the company expected.

Still, the debt crisis is making banks wary of lending to each other and driving up interbank lending costs, which may reduce the flow of credit to companies and households.

Europe’s banks will have to write down 195 billion euros ($239 billion) of bad debt by 2011, on top of the 444 billion euros of writedowns they have already logged, the European Central Bank said on May 31.

Praktiker AG, Germany’s second-biggest home improvement retailer, said last month it expects sales to drop further at its stores in Greece as the government implements budget cuts worth 14 percent of the country’s gross domestic product.

“We better get used to the idea of considerably slower growth from the end of this year,” said Andreas Moeller, an economist at WGZ Bank in Duesseldorf. “Germany’s economy is overly reliant on exports, and the crisis is pulling the rug from under its feet.”

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

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