Investor confidence hit by Spain's struggles
Funds which invest in Germany are taking fright that the eurozone crisis is hitting the economy, the powerhouse on which eurozone debt rescues largely depend, a survey showed on Tuesday.
Investor confidence showed the sharpest fall in June for nearly 14 years. Germany has the biggest economy in the European Union and has so far been resilient to the eurozone debt crisis, largely thanks to the power of its industrial exports.
But the ZEW think tank's economic expectations index, having fallen by more than 12 points last month, plunged a further 27.7 points this month to minus 16.9 points, the lowest level since January.
The drop was the steepest fall since October 1998 and reflected concerns about the escalation of the situation in the Spanish banking sector, as well as the fate of Greece, ZEW said in a statement.
The poll was mostly carried out before the outcome was known of the Greek parliamentary elections at the weekend, where pro-bailout parties emerged the winners, easing fears Greece could exist the single currency.
Nevertheless, the vote "affords us a short breathing space, but nothing more and nothing less," ZEW chief Wolfgang Franz warned.
"Analysts' expectations offer a stern warning against taking an all-too-optimistic view of Germany's economic outlook this year," Franz said.
There were unmistakable risks of a sharp economic downturn in Germany's key trading partners.
"In addition, there is the still precarious situation in the euro area," he said.
For the survey, ZEW questions analysts and institutional investors about their current assessment of the economic situation in Germany, as well as their expectations for the coming months.
The sub-index measuring investors' assessments of the current situation fell by 10.9 points to 33.2 points, also its lowest reading since January.
The ZEW index is the only barometer of investor confidence in Germany and this month's reading was based on responses from 274 analysts.
A frequent criticism against it is that the index can be volatile and is therefore not particularly reliable.
Analysts polled by Dow Jones Newswires had been expecting it to fall again this month, but still remain in positive territory.
Capital Economics economist Ben May said the latest reading "provides further support to the view that the eurozone slowdown is now hitting Germany pretty hard."
While the ZEW had not proved to be "a particularly reliable indicator of German gross domestic product growth in the past, it points to barely positive annual GDP growth," May said.
"With more reliable indicators of German economic activity recently painting a pretty downbeat picture, we still see GDP expanding by a below consensus 0.5 percent this year, with worse to come in 2013," May said.
Newedge Strategy analyst Annalisa Piazza suggested the unexpectedly sharp drop in the index "clearly shows a general sense of panic amongst investors."
The data "point to risks of a deeper-than-expected recession" for the euro area as a whole, she said, suggesting the European Central Bank could soon be spurred into action.
Berenberg Bank economist Christian Schulz agreed. If EU leaders make progress in drawing up a convincing policy response at their upcoming summit on June 28-29, "the ECB could complement the response with an interest rate cut and further liquidity providing operations at its next policy meeting on July 5 at the latest," Schulz said.
"Such a policy response could calm the market turmoil for a while again and lead to improving economic confidence and growth prospects. Towards the end of the year, we expect Germany's economy to grow again and help drag the rest of the eurozone out of recession," he concluded.