German investor confidence fell the most in 14 years in June as Europe’s sovereign debt crisis weighed on the economic outlook.
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, plunged to minus 16.9 from 10.8 in May. That’s the steepest decline since October 1998. Economists forecast a drop to 2.3, according to the median of 38 estimates in a Bloomberg News survey.
Germany’s economy, which grew 0.5 percent in the first quarter, is losing momentum as austerity measures across Europe curb demand for its goods and damp confidence. Exports, factory orders and industrial production all fell in April and business sentiment waned in May. The benchmark DAX share index has dropped 12 percent in the last three months.
Today’s report “clearly shows a general sense of panic amongst investors,” said Annalisa Piazza, a fixed-income strategist at Newedge Strategy in London. It points to “risks of a deeper-than-expected recession” in the euro area, she said.
ZEW’s gauge of sentiment in the 17-nation euro region slumped to minus 20.1 from minus 2.4. A measure of current conditions in Germany fell to 33.2 from 44.1.
The euro extended losses after the report before rebounding to trade at $1.2624 at 12:20 p.m. in Frankfurt, up 0.4 percent today. European stocks gained for a third day as Greece moved toward forming a government and a Spanish debt sale met targets. The Stoxx Europe 600 Index rose 0.5 percent to 245.49.
While the European Commission predicts the euro economy will shrink 0.3 percent this year, the Bundesbank on June 8 revised up its 2012 growth forecast for Germany to 1 percent from 0.6 percent.
Rising wages and unemployment at a two-decade low are bolstering domestic spending, helping to insulate Germany from the debt crisis. German companies are also compensating for weaker European demand by tapping faster-growing markets elsewhere.
Today’s report is “a strong warning against a too optimistic assessment of Germany’s economic perspectives in the remainder of this year,” said ZEW President Wolfgang Franz. “The risks of a pronounced decline in economic activity in countries with close trade ties to Germany are very clear.”
Concerns about Spain’s banking sector and elections in Greece have exacerbated a debt crisis that’s now in its third year. Spanish 10-year bond yields rose to a euro-era record of 7.29 percent yesterday after data showed bad loans as a proportion of total bank lending jumped to 8.72 percent, the highest since 1994.
Spain, the fourth-largest economy in the euro area, is battling to reduce its debt load amid a recession that has driven unemployment to more than 24 percent. The country on June 9 sought a European bailout of as much as 100 billion euros ($126 billion) for its banks.
“The re-intensification of the crisis in the euro area, with Spain now being in the spotlight, is weighing on German confidence and economic activity,” said Aline Schuiling, an economist at ABN Amro Bank NV in Amsterdam. “The decline in the ZEW reflects that German growth will slow down in the coming months.”
Central Bank Stimulus
While the European Central Bank held its benchmark interest rate at 1 percent on June 6, President Mario Draghi said “a few” policy makers called for a cut, fueling speculation the ECB could act as soon as next month. There are no inflation risks in the euro area, Draghi said on June 15.
U.K. inflation slowed to 2.8 percent in May, the weakest in 2 1/2 years, the Office for National Statistics in London said today. That may ease resistance among Bank of England policy makers to increase monetary stimulus.
Federal Reserve officials begin a two-day meeting today amid speculation they will take further steps to boost growth in the world’s biggest economy.
Economists are paring forecasts for China’s growth, with Credit Suisse Group AG seeing a 7.7 percent expansion this year, the weakest pace since 1999.
Still, China’s commerce minister said his nation’s economy is heading for a rebound this month following government measures to support expansion, adding to signals of confidence among officials that the slowdown is ebbing.
“I personally think that the June situation is turning for the better,” Chen Deming told reporters yesterday in Los Cabos, Mexico, without specifying the signs of improvement.