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German Investor Confidence Drops as Recovery Remains ‘Fragile’

13/10/2009 12:32
German investor confidence unexpectedly declined for the first time in three months in October amid concerns that the nascent recovery in Europe’s largest economy remains “fragile.”

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months ahead, dropped to 56 from 57.7 in September. Economists had forecast an increase to 58.8, the median of 36 forecasts in a Bloomberg News survey showed.

Germany’s benchmark DAX index has surged 58 percent since early March as the economy pulled out of the worst recession since World War II. While economic growth probably accelerated in the third quarter, according to the Bundesbank, the pace of the recovery may be tempered by rising unemployment, the fading of stimulus measures and the euro’s increase against the dollar.

“A decline in investor confidence isn’t that big a deal,” Andreas Scheuerle, an economist at DekaBank in Frankfurt, said before the survey was published. “Analysts have given the recovery an early round of applause, which the economy has to live up to now. The recovery is still a fragile little plant but overall, it’s doing well.”

ZEW’s gauge of the current economic situation fell to minus 72.2 from minus 74 in September.

The euro erased its gains after the report and was little changed at $1.4769 as of 10:02 a.m. in London. It has earlier risen to as high as $1.4804.

‘Too Much’

The performance of the DAX has been matched across Europe, where the Dow Jones Euro Stoxx 50 has risen 55 percent since early March. In the U.S., the S&P 500 has surged 59 percent.

The stock-market gains may reverse if the recovery isn’t sustained. Nouriel Roubini, the New York University professor who predicted the financial crisis, on Oct. 3 said that markets have “gone up too much, too soon, too fast.”

Germany’s economy probably expanded around 0.75 percent in the third quarter from the second, when it grew 0.3 percent, Bundesbank President Axel Weber said Oct. 3. Still, the recovery “continues to rely on support from fiscal and monetary policies, and that shouldn’t be withdrawn too quickly,” Weber said.

The government is spending 85 billion euros ($125 billion) to revive growth, including a 2,500-euro payment for people who scrap an old car to buy a new one. The 5-billion-euro car- purchase fund ran dry last month. The Bundesbank projects unemployment will rise to 10.5 percent in 2010 from 8.2 percent in September.

‘Bumpy’ Recovery

The euro-area economy is also facing rising unemployment and a “bumpy” recovery, European Central Bank President Jean- Claude Trichet said on Oct. 9.

In addition to joblessness, the euro’s appreciation against the dollar may hinder the recovery by eroding export competitiveness. Aurelio Maccario, chief euro-area economist at UniCredit Group in Milan, estimates that the euro’s 2 percent appreciation in trade-weighted terms since the start of the third quarter is enough to shave 0.2 percentage points off euro- area growth through 2010.

“We’ve had quite a remarkable summer with catch-up processes that boosted economic activity,” said Laurent Bilke, an economist at Nomura in London. “Now we expect a normalization and a come-back toward the underlying trend, which is obviously lower. But it won’t be a relapse.”