German Investor Confidence Surges as Debt Crisis Eases

German investor confidence jumped to a 21-month high in March after the European Central Bank flooded financial markets with cash and the sovereign debt crisis showed signs of abating.

The ZEW Center for European Economic Research in Mannheim said today its index of investor and analyst expectations, which aims to predict economic developments six months in advance, advanced to 22.3 from 5.4 in February. That’s the fourth straight increase and the highest reading since June 2010. Economists forecast a gain to 10, according to the median of 36 estimates in a Bloomberg News survey.

Germany’s benchmark DAX share index is up 18 percent this year, outperforming its main European counterparts as investors bet the region’s largest economy will return to growth after shrinking in the fourth quarter of 2011. The ECB’s injection of more than 1 trillion euros ($1.3 trillion) of three-year loans into the banking system in an attempt to unlock credit for companies and households is also helping to fuel a rally on European bond markets.

“Investors have obviously buried any German recession concerns,” said Carsten Brzeski, an economist at ING Group in Brussels. “The ECB loans, progress on solving the crisis and the latest rally on stock markets have more than offset the negative impact from higher oil prices and the fact that the cold winter may have damped growth in February.”

Current Situation

ZEW’s gauge of the current economic situation eased to 37.6 from 40.3 in February. The euro declined after the release to $1.3117 at 12:07 p.m. in Frankfurt from $1.3145 beforehand.

ECB President Mario Draghi said March 9 that the outlook for the 17-nation euro area, Germany’s largest export market, “has improved enormously” and there are “many signs of returning confidence in the euro.”

In Asia, Japan’s central bank rejected lawmakers’ calls to expand asset purchases today for a second straight month, spurring stocks to surrender gains.

Governor Masaaki Shirakawa and all but one of his colleagues on the Bank of Japan (8301) board declined to boost asset buying after adding 10 trillion yen ($120 billion) in stimulus last month. The bank instead unveiled a 2 trillion-yen increase in a program aimed at lifting Japan’s long-term growth rate, with 1 trillion yen of the credit to be in U.S. dollars.

In the U.S., the best six months of job gains since 2006 have helped reduce the odds of a third round of asset purchases by the Federal Reserve, according to a Bloomberg News survey of economists. The Federal Open Market Committee meets today and plans to release a statement at about 2:15 p.m. after its gathering in Washington.

Greek Crisis

Greece pushed through the biggest sovereign restructuring in history last week, cajoling investors to forgive more than 100 billion euros of debt. Euro-region finance ministers subsequently agreed Greece has met conditions for a second rescue package worth 130 billion euros designed to prevent a collapse of the Greek economy and contain the debt crisis.

The Bundesbank said on Feb. 20 the outlook for Germany’s economy has “improved perceptibly,” even though “risks relating to the sovereign debt crisis remain.” It forecast in December that growth will slow to 0.6 percent this year from 3 percent in 2011 before accelerating to 1.8 percent in 2013.

Inflation Risks

Audi AG (NSU), the world’s second-largest maker of luxury vehicles, said on March 1 it is targeting 2012 profit “on par” with last year’s record results as higher sales offset increased spending on new models and factories.

Still, austerity measures across Europe are curbing foreign sales and clouding growth prospects. The euro-area economy will shrink 0.3 percent this year, driven by contractions of 1.3 percent in Italy and 1 percent in Spain, the European Commission said Feb. 23.

Adding to the euro region’s headwinds is a 40 percent jump in oil prices over the last five months that is pushing up inflation and eating into household spending, said Thomas Costerg, an economist at Standard Chartered Bank in London.

While slower economic growth outweighed the impact of higher energy prices, pushing down inflation in France and Spain for February according to data published today, price growth accelerated in Germany. In Italy, the inflation rate stayed at 3.4 percent, well above the ECB’s inflation limit, a report showed today.

“Investors see the need for rate increases given the increased inflation expectations, but politically they don’t see it taking place,” said ZEW economist Michael Schroeder.

Still, concerns about inflation were offset by “recent positive data,” said Ralph Solveen, an economist at Commerzbank AG in Frankfurt. Fears about slowing growth “are vanishing,” he said.

To contact the reporter on this story: 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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