German investor confidence unexpectedly dropped in July, adding to signs that the Europe’s largest economy is struggling to gather strength.
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, fell to 36.3 from 38.5 in June. That’s the first decline in three months. Economists forecast a gain to 40, according to the median of 37 estimates in a Bloomberg News (GRZEWI) survey.
German industrial production, factory orders and exports all slid in May. While unemployment dropped in June and the Ifo institute’s measure of business confidence rose, the European Central Bank says risks to the economic outlook in the euro area, Germany’s biggest trading partner, remain on the downside. In an unprecedented step to reassure investors, ECB President Mario Draghi committed on July 4 to keeping interest rates low for an extended period of time.
“Signals have been very contradictory,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “Sentiment indicators have been good, concurrent indicators were rather weak, but I’m not too pessimistic for the rest of the year. Uncertainty is slowly waning and the ECB’s forward guidance should provide some support.”
The ECB’s pledge on rates followed a June 19 announcement by Federal Reserve Chairman Ben S. Bernanke that the U.S. may phase out bond purchases by the middle of next year. That sent global stocks and bonds tumbling, boosting sovereign yields in Europe’s debt-strapped periphery.
ECB Executive Board member Vitor Constancio said the promise to keep rates at the present level or lower was “successful in stabilizing financial markets.” Germany’s benchmark DAX index has gained about 4 percent since Draghi’s announcement of forward guidance.
Still, the International Monetary Fund last week downgraded its economic outlook for the euro area. The Washington-based lender now predicts gross domestic product in the 17-nation region will decline 0.6 percent before rising 0.9 percent in 2014. It forecasts German growth of 0.3 percent this year and 1.3 percent next.
The Bundesbank said on June 17 that GDP should have improved “markedly” in the second quarter, while warning of signs of a potential slowdown in coming months. Factory orders unexpectedly fell 1.3 percent in May from April, the second decline in as many months, and industrial output slid 1 percent, more than economists predicted. Exports dropped 2.4 percent.
Kloeckner & Co SE, the German steel trader part-owned by the Knauf family, expects a pretax loss this year because of the industry’s crisis in Europe, Chief Financial Officer Marcus Ketter told Germany’s Boersen-Zeitung on July 13.
“We’re in for a very strong second quarter, followed by weaker growth in the second half of the year,” said Ulrike Rondorf, an economist at Commerzbank AG in Frankfurt. “Uncertainty in financial markets has dropped considerably.”
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