German Investor Confidence Unexpectedly Drops for First Time Since October

German investor confidence unexpectedly fell for the first time in five months in March after the European Central Bank said it may raise interest rates and Japan’s biggest earthquake on record caused a slump in global stocks.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months in advance, declined to 14.1 from 15.7 in February. Economists had expected a gain to 15.9, according to the median of 38 estimates in a Bloomberg News survey.

Germany’s DAX Index (DAX) extended its drop today, taking losses in the past month to more than 11 percent, on concern about the global economic impact of the disaster in Japan. The prospect of higher ECB rates is also weighing on investor sentiment, ZEW said. Still, German companies are increasing investment and hiring to meet booming export orders, fueling domestic spending and putting the economic recovery on a firmer footing.

“The recovery is not in danger yet, but the risks have increased,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. “The full scale of the catastrophe in Japan and its economic impact can’t be estimated yet.”

The euro was little changed after the report at $1.3874. ZEW’s indicator measuring current economic conditions rose to 85.4 in March from 85.2 the previous month.

ECB, Quake Impact

ZEW said survey responses that came in after an 8.9- magnitude earthquake and tsunami struck Japan on March 11 were significantly more pessimistic than those received beforehand.

Based on post-quake responses, the index would have dropped to 9.1, ZEW said. The ECB’s surprise announcement on March 3 that it may raise borrowing costs in April to curb inflation also damped sentiment. Responses received between March 4 and March 10 yielded an index reading of 12.6, while those before March 3 showed a jump in confidence with a reading of 22.5.

“I would suspect the figures would have deteriorated further if we had conducted the survey Monday and Tuesday” this week, said Michael Schroeder, head of ZEW’s financial markets department. “Seeing the news out of Japan, the indicator is likely to drop further next month.”

Slower growth in Japan, the world’s third-largest economy, may hurt its trading and business partners. Germany’s Metro AG, the world’s third-largest retailer, said all of its stores in Japan were damaged.

Risks for Europe

“It’s difficult to gauge the impact of the Japanese earthquake on the various economies,” said Joerg Lueschow, an economist at WestLB AG in Dusseldorf. “Parts of the country are so destroyed that there won’t be any production any time soon. The Japanese economy will probably shrink this quarter and next and that will also have an effect on trading partners. Certainly, the risks for the euro area’s economic outlook have increased.”

The Bundesbank expects Germany’s economy to expand 2.5 percent this year after record growth of 3.6 percent in 2010.

German carmakers are forecasting sales gains this year on higher spending in the U.S. and growing wealth in China. Volkswagen AG is adding shifts to meet demand, Chief Executive Martin Winterkorn said on March 10. Bayerische Motoren Werke AG, the world’s largest maker of luxury vehicles, said today it aims to increase profit in 2011 after record results last year.

More Jobs

The improving outlook has fueled hiring, pushing the German jobless rate down to 7.3 percent last month, the lowest since December 1991. Factory orders jumped 2.9 percent in January and manufacturing growth accelerated in February.

ECB President Jean-Claude Trichet signaled on March 3 that the bank is ready to raise interest rates next month after inflation in the 17-nation euro region accelerated to 2.4 percent in February, breaching the ECB’s 2 percent limit for a third month.

“The prospect of higher interest rates is not exactly inspiring markets,” said Andreas Moeller, an economist at WGZ Bank in Dusseldorf. “While an increase is not going to kill off the recovery, it’s enough to slow it down in some periphery countries.”

To contact the reporters on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net; Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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