German Investor Confidence Probably Decreased in July

By Christian Vits

July 15 (Bloomberg) -- German investor confidence probably dropped to the lowest level in almost 16 years in July as faster inflation and higher interest rates dimmed the outlook for growth in Europe's largest economy, a survey of economists shows.

The ZEW Center for European Economic Research will say its index of investor and analyst expectations fell to minus 55 from minus 52.4 in June, according to the median of 37 forecasts in a Bloomberg News survey. That would be the lowest reading since December 1992. ZEW issues the report at 11 a.m. in Mannheim today.

Record oil and food prices prompted the European Central Bank to raise its key rate by a quarter point to 4.25 percent this month, further squeezing purchasing power. With a stronger euro weighing on exports and the deepening U.S. housing slump damping confidence worldwide, Germany's benchmark DAX share index has dropped 7 percent in the past month and 23 percent this year.

``Higher inflation, the slump in equity markets and the ECB's interest-rate hike are all weighing on sentiment,'' said Juergen Michels, an economist at Citigroup Inc. in London. ``Freddie Mac and Fannie Mae may add to this trend.''

Treasury Secretary Henry Paulson has asked Congress for authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, which buy or finance almost half the $12 trillion of U.S. mortgages. The companies' shares lost about half their value last week on concern they will run short of capital.

About 50 percent of the responses to the ZEW survey came in after July 9, when news broke that Freddie Mac and Fannie Mae may be in trouble, said Sandra Schmidt, an economist at the institute.

`Any Kind of Crisis'

``The markets are currently focusing on any kind of crisis,'' said Gertrud Traud, chief economist at Landesbank Hessen- Thueringen in Frankfurt. ``However, we should be quite close to the low point, as everything negative is priced in already.''

Germany's economy probably shrank in the three months through June, Deputy Economy Minister Walther Otremba said last month.

Economic growth may slow to 1 percent in 2009 from 2.4 percent this year, the Munich-based Ifo institute said June 24, a day after reporting its gauge of business confidence dropped to a two-year low.

``The cooling of world economic activity will damp foreign sales and the stronger euro is an additional restricting factor,'' Ifo said.

Financial Turmoil

Europe's single currency has gained 15 percent against the dollar over the past year, while the collapse of the U.S. subprime mortgage market has roiled financial markets and damped the outlook for global growth.

The world's biggest financial companies have posted more than $400 billion in writedowns and credit losses since the start of last year.

ECB policy makers say Europe's economic fundamentals are sound and they're more concerned about inflation, which accelerated to 4 percent last month, the fastest in more than 16 years.

Oil prices have almost doubled in the past year and reached a record $147.27 a barrel last week. Maize prices have almost tripled since the beginning of 2006 and wheat prices have risen by more than 80 percent, the ECB said in its June monthly report.

The gloomy growth outlook may prevent the central bank from raising interest rates further. Eonia forward contracts show investors have scaled back bets on higher rates. The March contract was at 4.38 percent yesterday, down from 4.74 percent a month ago.

Still, Germany's gross domestic product, which accounts for about a third of the euro-region economy, rose 1.5 percent in the first quarter from the previous three-month period as companies stepped up spending on machinery and construction.

Economic growth is likely to be ``more subdued'' in the second and third quarters before picking up again at the end of the year, Germany's Bundesbank said last month.

To contact the reporter on this story: Christian Vits in Frankfurt cvits@bloomberg.net.