July 19 (Bloomberg) -- Investor confidence in Germany, Europe’s largest economy, dropped more than economists forecast in July as the euro-area debt crisis worsened.
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, fell to minus 15.1 from minus 9 in June. That’s the lowest since January 2009. Economists expected a decline to minus 12.5, according to the median of 42 estimates in a Bloomberg News survey.
Germany’s benchmark DAX index has shed more than 2 percent this month amid investor concern that the debt crisis, which has already engulfed Greece, Ireland and Portugal, will spread to Italy. While government belt-tightening across the region and slowing global demand may damp growth, the Bundesbank said yesterday that Germany’s outlook remains “favorable” as falling unemployment boosts consumer spending.
“July’s drop in German ZEW investor sentiment highlights fears that the peripheral crisis could soon do some serious damage to the German economy,” said Jennifer McKeown, senior European economist at Capital Economics in London. “With the euro zone’s largest economy unable to act as a locomotive, we see the region’s recovery grinding to a halt in the coming quarters.”
Still, ZEW’s gauge of current economic conditions rose to 90.6 from 87.6 in June. The euro was little changed at $1.4192 after the report was published.
The Bundesbank on June 10 raised its German growth forecast for this year to 3.1 percent from 2.5 percent. Euro-area growth will average 1.9 percent in 2011, the European Central Bank forecast last month.
European leaders have struggled to contain a debt crisis that originated in Greece and has forced Ireland and Portugal to seek bailouts as well. At a summit this week, they’ll seek to revamp their strategy and snap a deadlock that is spooking investors and prompting warnings of contagion from the International Monetary Fund.
Italian 10-year bond yields rose to a euro-era record of more than 6 percent yesterday.
“The escalation in Italy was probably an important element in this month’s survey,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “I’m still very satisfied with the performance of the German economy. While growth will slow down, the outlook continues to be rosy.”
German companies have ramped up investment and hiring to meet booming export demand, helping drive economic expansion of 1.5 percent in the first quarter. Business confidence unexpectedly improved in June, factory orders surged for a second month in May and industrial production rebounded.
Volkswagen AG, Europe’s biggest carmaker, said on July 15 it expects to continue outperforming the auto market in the second half after posting a record 4.1 million deliveries in the first six months of the year.
VCI, the main association of German chemical companies, last week raised its 2011 sales growth forecast one percentage point to 10 percent.
“A soft patch in the global economy is beginning to materialize but overall, the German economy will continue to outperform the euro-area average,” said Aline Schuiling, senior economist at ABN Amro Bank NV in Amsterdam. “We’ll observe a slowdown but growth will remain solid.”
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