German Investor Confidence Drops for Third Month as Bank Stress Tests Loom

German investor confidence declined for a third month in July as Europe’s debt crisis threatens to cripple economic growth and banks undergo stress tests to prove their durability.

The Mannheim-based ZEW Center for European Economic Research said today its index of investor and analyst expectations, which aims to predict developments six months ahead, fell to a 15-month low of 21.2 from 28.7 in June. Economists had forecast a drop to 25.3, according to the median of 34 forecasts in a Bloomberg News survey.

Governments across the 16-nation euro region are cutting spending to rein in excessive budget deficits, threatening to undermine the economic recovery. At the same time, regulators are carrying out stress tests on 91 lenders aimed at reassuring investors that banks have enough capital to withstand shocks.

“Investors are becoming increasingly worried about a deterioration of sentiment worldwide, which signals that Germany’s export-led recovery will slow down before long,” said Andreas Rees, chief German economist at UniCredit MIB in Munich. “We’ll see an impact around the turn of the year. A double-dip is a serious risk scenario.”

The euro rose after the report to $1.2572 from $1.245. The benchmark DAX share index resumed its climb after a brief dip. It gained 4 percent last week.

Current Conditions

Latest data suggest economic growth accelerated in the second quarter. German exports surged 9.2 percent in May, unemployment fell in June and business confidence unexpectedly rose to a two-year high. ZEW’s gauge of current conditions turned positive for the first time in two years, jumping to 14.6 from minus 7.9 in June.

The Bundesbank on June 11 raised its growth forecasts, predicting expansion in Europe’s largest economy of 1.9 percent this year and 1.4 percent in 2011, up from 1.6 percent and 1.2 percent respectively. Exports, which accounted for 41 percent of gross domestic product last year, will be one of the “main driving forces,” the central bank said.

Executives from Bayerische Motoren Werke AG, Volkswagen AG’s Audi unit and Siemens AG credit the euro’s 17 percent decline against the dollar since November for boosting competitiveness and making revenue earned overseas worth more when they bring it home.

Slower Recovery

Volkswagen’s sales in China surged 46 percent in the first half of the year after the company introduced new models to attract consumers in the world’s largest vehicle market.

“The economy won’t be able to maintain its pace of expansion in the second half of the year,” said Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt. “After a very, very strong second quarter, the recovery will slow down. But it will continue.”

Budget cuts may hurt consumer confidence and spending and curb demand for German goods in the euro area, its biggest export market. Concern about the health of the banking sector may also cloud the economic outlook.

A number of lenders will probably fail the stress tests that are currently being conducted, Guido Ravoet, secretary general of the Brussels-based European Banking Federation, said on July 9. Governments “must stand ready to assist these banks” as they may struggle to tap markets for additional capital, he said. The results of the tests are due to be published on July 23.

“We don’t know how severe the tested scenarios will be,” said Rainer Sartoris, an economist at HSBC Trinkaus & Burkhardt in Dusseldorf. “It remains to be seen whether we will be much smarter afterwards.”

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net.

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