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German Investor Sentiment Plunges on Debt Crisis

Car tires are seen stacked at the Continental AG factory in Aachen, Germany. Photographer: Wolfgang von Brauchitsch/Bloomberg
Car tires are seen stacked at the Continental AG factory in Aachen, Germany. Photographer: Wolfgang von Brauchitsch/Bloomberg

June 15 (Bloomberg) -- German investor confidence plunged in June on concern that the sovereign debt crisis will undermine export prospects and crimp growth in Europe’s largest economy.

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, slumped to 28.7 from 45.8 in May. That’s the biggest decline since October 2008 following the collapse of Lehman Brothers Holdings Inc. Economists forecast a drop to 42, according to the median of 35 estimates in a Bloomberg News survey.

Greece’s near default has prompted governments from Berlin to Madrid to implement budget cuts to convince investors they can tame deficits, threatening to damp demand and hurt the region’s economic recovery. While the euro’s 15 percent drop against the dollar this year may boost exports outside the currency region, the 16-nation bloc is Germany’s most important market.

“Investors are now worried that governments will kill off the recovery with their austerity measures,” said Jens Kramer, an economist at NordLB in Hanover. “While they realize that the budget deficits have to be reined in, it’s almost impossible to do that without slowing down growth, particularly among Germany’s main trading partners.”

The euro initially fell after the report before rebounding to $1.2259 at 12:30 p.m. in Frankfurt. European stocks also recouped losses to trade higher. Germany’s benchmark DAX index has gained 5 percent in the past week.

Current Conditions Improve

For now, Germany’s economy is showing few signs of discomfort, with the unemployment rate unexpectedly falling to 7.7 percent last month as companies ramped up production and added workers to meet booming orders. ZEW’s gauge of current conditions rose to minus 7.9 from minus 21.6 in May.

The headline ZEW number “is not as shocking as it seems,” said Klaus Baader, co-chief European economist at Societe Generale SA in London. “Yes, it’s a big drop, but it’s still around the long-term average” of 27.4, he said.

The Bundesbank on June 11 raised its growth forecasts, predicting expansion of 1.9 percent this year and 1.4 percent in 2011, up from 1.6 percent and 1.2 percent respectively.

Continental AG, Europe’s second-biggest car-parts maker, on June 10 increased its sales-growth estimate for this year to more than 10 percent after business through May was stronger than the company expected.

‘Worrying Sign’

Still, “the decline in ZEW expectations, together with recent falls in business and consumer sentiment, is a worrying sign for the future,” said Jennifer McKeown, an economist at Capital Economics Ltd. in London. “Fears about peripheral debt are damaging sentiment towards core euro-zone economies.”

Greece’s credit rating was cut to non-investment grade by Moody’s Investors Service yesterday, threatening to further undermine demand for the nation’s assets as it struggles to rein in the euro region’s second-biggest deficit.

Fitch Ratings last month stripped Spain of its top AAA credit grade and questioned the nation’s ability to grow its economy as the government reduces spending.

The debt crisis is making banks wary of lending to each other amid concern financial companies own too many bonds from Europe’s most indebted nations. That’s driving up interbank lending costs, which may reduce the flow of credit to companies and households.

Bank Writedowns

Europe’s banks will have to write down 195 billion euros of bad debt by 2011, on top of the 444 billion euros of writedowns they have already logged, the European Central Bank said on May 31.

Praktiker AG, Germany’s second-biggest home-improvement retailer, said last month it expects sales to drop further at its stores in Greece as the government implements budget cuts worth 14 percent of the country’s gross domestic product.

“We better get used to the idea of considerably slower growth from the end of this year,” said Andreas Moeller, an economist at WGZ Bank in Duesseldorf. “Germany’s economy is overly reliant on exports, and the crisis is pulling the rug from under its feet.”

To contact the reporter on this story: Gabi Thesing in London at gthesing@bloomberg.net

To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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