German investor mood brightens

Investors’ gloom over German economic prospects has lifted this month, with recession fears receding, according to a closely-watched survey.

The improvement in the Mannheim-based ZEW institute’s economic sentiment indicator – by 8.4 points in August to minus 55.5 points – added to evidence that Europe’s largest economy might be over the worst of the economic downturn. German gross domestic product had contracted by 0.5 per cent in the three months to June, figures showed last week.

Financial market experts “reckon with a weaker, but all-in-all a robust development and, rightly, do not fear a recession,” said Wolfgang Franz, ZEW president. A technical recession is defined as two quarters of negative growth.

Meanwhile German producer price inflation accelerated to a 27-year high of 8.9 per cent in July, with the latest rise driven higher by energy costs. according to official figures. With German trade unions also lobbying for higher wage deals, “we can expect the German contingent on the governing council of the European Central Bank to remain in relatively hawkish mode,” said Ken Wattret at BNP Paribas.

Optimism about Germany’s growth prospects may have been boosted in the past few weeks falls in the euro and in oil prices. Unlike the US, the UK and Spain, Germany has not seen house prices soaring in recent years – and so is at no risk of a property market collapse. German industry also appears to have escaped largely unscathed from the effects of global financial turmoil.

Still, a rapid rebound in Germany appears unlikely. Growth this year has been hit by the effects of higher energy costs in curbing consumer spending, and of deteriorating global economic conditions on German exports. The ZEW index remains significantly lower than its historical average of 28.3 points.

The Bundesbank warned earlier this week that the German economy faced a “long, hard haul” in the second half of the year, even if second quarter growth figures had been distorted downwards by special factors.

At the same time, the ZEW index has sometimes proved volatile in the past and economists may put more weight on the Munich-based Ifo institute’s business confidence index and German purchasing managers indices’ due later this month.

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