German Investor Confidence Unexpectedly Drops in July

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 survey.

German industrial production, factory orders and exports all slid in May. While unemployment dropped in June, 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.

“The fall in the ZEW suggests that a deterioration in the hard data, including weak industrial production and trade figures in May, are now beginning to weigh on investor sentiment,” said James Howat, an economist at Capital Economics Ltd. in London. “We maintain our below-consensus forecast for the German economy to flat-line in 2013.”

Current Situation

ZEW’s gauge of the current situation climbed to 10.6 from 8.6 in June, while an indicator of euro-area investor confidence rose to 32.8 from 30.6. The group surveyed 256 investors and analysts from July 1 to July 15 and the poll showed respondents sticking with their “overall positive forecast” for the German economy, according to ZEW President Clemens Fuest.

“What this survey reflects is confidence that there will be a slight recovery but it maybe won’t be as clear as some people expected,” Fuest told reporters. “The euro-zone crisis certainly did play a role. What we see is consistent with a slightly dampened mood in the global economy.”

The euro gained 0.2 percent to $1.3082 at 12:10 p.m. in Frankfurt. Germany’s benchmark Dax stock index was down 0.3 percent at 8,213.93.

Global stocks and bonds tumbled last month, boosting sovereign yields in Europe’s debt-strapped periphery, after 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.

Contradictory Signals

The Dax index has rebounded about 4 percent since Draghi’s announcement of forward guidance on interest rates. ECB Executive Board member Vitor Constancio said July 12 that the promise to keep rates at the present level or lower was successful in stabilizing financial markets.

“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 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.

Steel Crisis

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.

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. Still, retail sales gained in May and the Ifo institute’s measure of business confidence rose for a second month in June.

“Today’s ZEW index fits into the current picture that the German economy looks like a grab bag, which has something for everyone,” said Carsten Brzeski, senior economist at ING Groep NV in Brussels. “For the optimists, there is the strong labor market, solid private consumption, strong construction growth and confidence indicators at high levels. At the same time, however, there are dropping new orders, disappointing exports and the continuing euro crisis for the pessimists.”

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