German Investor Confidence Unexpectedly Rises to 3-Year High

German investor confidence unexpectedly rose to a three-year high in March, suggesting Europe’s largest economy will return to growth.

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 in advance, increased to 48.5 from 48.2 in February. That’s the highest since April 2010. Economists forecast a decline to 48.1, according to the median of 40 estimates in a Bloomberg News survey.

The Bundesbank predicts the economy will expand in the current quarter after contracting 0.6 percent in the final three months of last year. Business confidence improved for a fourth month in February. Still, political turmoil in Italy and the specter of a bank run in Cyprus are spooking financial markets and threatening to derail an economic recovery in the euro area, Germany’s biggest export market.

The increase in the ZEW index “leaves it at a high level, but there is a clear risk that ongoing developments in Cyprus and Italy prompt renewed falls soon,” said Jennifer McKeown, senior European economist at Capital Economics in London. “We suspect that sentiment will weaken in the coming months and, while Germany should continue to easily outperform the rest of the euro zone, a strong recovery seems like too much to hope for.”

Current Conditions

ZEW’s gauge of the current situation rose to 13.6 from 5.2 in February. The euro climbed after the report before retracing to $1.2933 at 11:50 a.m. in Frankfurt, down 0.2 percent today.

ZEW said 13 percent of the 245 responses to this month’s survey were received yesterday, when news of the Cypriot levy on bank deposits sent the euro to its lowest level this year and caused stocks and commodities to tumble.

Moody’s Investors Service said the Cypriot levy is negative for bank depositors across Europe.

European Central Bank council member Ewald Nowotny yesterday urged the Cypriot government to find a “fast and responsible solution” to secure a European Union-led bailout, rein in uncertainty and prevent a freeze in spending and investment.

‘Difficult’ Year

Volkswagen AG (VOW) and Bayerische Motoren Werke AG last week predicted a “difficult” 2013 as European car sales decline and vehicle prices in the region drop. Still, Continental AG (CON), Europe’s second-largest maker of auto parts, stuck with its 2013 forecasts on March 7.

The Bundesbank said yesterday that the German economy fell short of expectations at the beginning of the year. At the same time, “the slow start into 2013 doesn’t put the outlook for an economic recovery into question,” it said.

It predicts the German growth of 0.4 percent this year. By contrast, the ECB forecasts that the euro-area economy, Germany’s largest export market, will contract 0.5 percent.

“The main risk to an eventual recovery in domestic demand in Germany is a renewed intensification of the euro crisis,” said Elga Bartsch, chief European economist at Morgan Stanley & Co. in London. Still, “Germany will probably be able to avoid a recession,” she said.

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

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

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