German ZEW investor confidence survey drops sharply

German investor confidence has plunged to the lowest level since late 1992, a survey showed on Tuesday, due to record oil prices and expectations of higher borrowing costs in the euro zone.

The ZEW institute said its closely watched indicator of economic sentiment for June fell by a much sharper-than-expected 11.0 points to minus 52.4 points. Economists polled by Dow Jones Newswires had expected a much more gentle decline of less than one point to about minus 42 points.

“On the one hand, repeatedly decreasing incoming orders indicate that Germany’s momentum will lose steam in the next six months. On the other hand, continuing price increases for energy and food are reducing the purchasing power of consumers,” the ZEW said in a statement.

“Furthermore, loan conditions for companies should worsen as a result of the financial market crisis and the expected interest rate increase by the ECB,” it added in reference to the European Central Bank.

The ZEW, which polled 264 analysts and institutional investors for its monthly survey, also said its indicator on the current economic situation in Europe’s biggest economy fell 1.0 point to 37.6 points. In the first quarter German gross domestic product (GDP) grew by 1.5 percent or by a real 2.6 percent when adjusted for the number of working days – by euro zone standards a stellar rate.

The ZEW survey adds to evidence that the German economy is entering a period of weaker growth after this strong start to the year, however. German industrial production data for April released on June 6 showed a surprise fall, while numbers for industrial orders published a day earlier revealed a decline for the fifth straight month, and at an accelerated rate.

But although the last time that the ZEW survey reached this low level was when Germany was in a recession, economists are steering clear of the “R-word” this time around.

“(With) generous earnings margins and German companies in a strong competitive position, we do not envisage a recession,” Commerzbank economist Matthias Rubisch said in a research note.

Indeed other figures show that Germany’s export sector, the backbone of the economy, is doing well despite a stronger euro making its products more expensive compared to those of its competitors from outside the euro zone.

The Bundesbank said earlier this month that Germany’s economic performance will be weaker in the coming quarters but it expressed confidence for a pick-up later as global conditions improve and inflation falls. And on Monday two of the country’s economic institutes, the DIHK and the IW, hiked their growth forecasts for 2008, to 2.3 percent and 2.5 percent respectively.

But what is new and what has made German investors suddenly more pessimistic is the effect of record oil prices – now close to $140 a barrel – on the interest rate policy of the ECB, economists said. Until recently it was thought that the next move by the bank would be to cut interest rates in the 15-nation euro zone.

But the seemingly inexorable rise in the price of crude and its effect on euro zone inflation – which hit a record 3.7 percent in May – prompted ECB head Jean-Claude Trichet to signal on June 5 a change of tack.

He strongly hinted that the next move would be a tightening, perhaps as early as next month, and many expect that rise might not be a one-off.

“With the economic risks already great, the ECB is running the risk that it will exacerbate the already expected slowdown through a tightening in monetary policy,” WestLB economist Jörg Lüschow warned.


German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.