Investor confidence falls

The recovery prospects for the German economy, Europe's biggest, took a knock Tuesday when data showed that investor sentiment fell more than expected this month.

Investor confidence falls
Photo: DPA

The widely watched investor confidence index calculated by the ZEW economic institute fell by 12.2 points to 36.3 points in April, after topping a three-year high last month.

It was the first time since November that the index has fallen. Analysts had been projecting a more modest decline to around 43 points.

ZEW argued the setback was a correction to the recent sharp increases. “Despite its decline, the indicator currently hovers at its third highest mark within the last 24 months. The current level has only been exceeded in the two preceding months,” the think tank said.

“Basically, the surveyed financial market experts remain confident, but are less optimistic than they have been in the previous month. The decline in economic sentiment is consistent with the release of economic data that fell short of expectations” said ZEW president Clemens Fuest.

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 financial market players’ view of the current economic situation in Germany fell by 4.4 points to 9.2 points in April.

A frequent criticism against the ZEW index is that it can be volatile and is therefore not particularly reliable.

“April’s fall in the ZEW index highlights investors’ fears that the German recovery will be short-lived,” said Capital Economics economist Jennifer McKeown.

The expert acknowledged that the index is still at a comparatively high level.

“And if the latest drop was related to fears about Cyprus, sentiment could recover once the dust starts to settle,” she ventured.

“But given growing fears about troubles in Slovenia, Portugal and Italy and their impact on the German economy and public finances, we suspect that further falls in sentiment are to come,” McKeown warned.

“While we still see Germany easily outperforming the rest of the eurozone this year, we think that a strong and sustained recovery is too much to hope for,” she added, predicting the German economy will “stagnate this year and grow by just 0.5 percent in 2014.”

Carsten Brzeski of ING bank suggested that “new uncertainty stemming from the euro crisis and doubts about the strength of the Chinese economy seem to have dented analysts’ optimism.”

However, “it only looks like a correction at a level still consistent with modest growth. The big confidence collapse some had expected after the Cypriot bailout has so far failed to appear,” he said.

Berenberg Bank economist Christian Schulz put the drop in the ZEW down to the “chaos surrounding the Cyprus bailout in late March.”

After the overly optimistic improvement in sentiment early this year, the latest ZEW reading “should be interpreted more as a correction of investors’ optimism rather than a clear deterioration in Germany’s economic outlook,” Schulz said.

“Moreover, one should not forget that the sentiment index still remains firmly in positive territory. All in all, we will await the release of the Ifo business climate index next week for stronger evidence on the economic outlook for the second quarter,” Schulz concluded.


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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.