Inflation hits German investor confidence

"Extraordinary" price rises badly dented German investor confidence in April, the ZEW institute said Tuesday as it reported a surprise drop in its closely watched monthly sentiment indicator.

The institute’s indicator fell 8.7 points and now stands at minus 40.7 points, down from minus 32.0 points in the previous month. Economists polled by Thomson Financial had expected the index to rise to minus 29.0 points.

“Economic expectations were affected by the extraordinary high price pressure in Germany this month,” the ZEW said in a statement. “High rates of inflation reduce the available income of consumers and, hence, weaken private consumption. Low numbers of incoming orders of German companies point to slower growth in Germany as well.”

In March the indicator posted a surprise improvement, the second in a row, adding to a growing body of data suggesting Europe’s biggest economy was proving resilient to the slowdown in the United States, rising energy and food prices and a strong euro.

Annual inflation in March in the 15-nation euro zone, of which Germany is the largest economy, hit 3.5 percent in March, its highest level since the creation of the euro in 1999 and well beyond the European Central Bank inflation target of just under 2.0 percent.

Data last week for instance showed that German exports – the motor of its economy – had risen 9.0 percent year-on-year despite the euro making them more expensive to customers outside the 15-nation euro zone. And economy ministry figures had shown meanwhile that German industrial output also rose 0.4 percent in February when analysts had forecast a drop.

“The slight optimism of the financial market experts last month seems to be only a temporary phenomenon,” ZEW president Wolfgang Franz said. “Record highs of the euro and the oil price have reduced expectations again.”

The news prompted the euro to drop across the board, briefly touching a daily low of 1.5814 dollars and retreating from an all-time high of 0.8063 against the pound.

“It appears that the euro’s continued climb and ongoing troubles in financial markets have led investors to feel that the recent run of positive data, particularly on the industrial side, will not continue,” said Jennifer McKeown at Capital Economics in London.

The survey “highlights a risk that, while the German economy is holding up well for now, it might only be a matter of time before the strong euro and weakening global demand take their toll,” McKeown said in a research note.

But on a brighter note, the ZEW said that growth of 1.7 percent this year – as predicted by the government – was “realistic” and that its indicator for the current economic situation had improved 1.1 points to 33.2 points.

Andreas Rees, economist at Unicredit, warned against irrational pessimism as a result of the survey, saying a recession in Germany was “definitely not around the corner.”