German Investor Confidence Probably Held Near a Record Low

By Simone Meier

Aug. 19 (Bloomberg) -- German investor confidence probably held near a record low in August after Europe's largest economy contracted in the second quarter, increasing the risk of a recession, a survey of economists shows.

The ZEW Center for European Economic Research will say its index of investor and analyst expectations rose to minus 62 from minus 63.9 in July, the lowest since the survey began in 1991, the median of 43 forecasts in a Bloomberg News survey shows. ZEW releases the report, which aims to predict economic developments six months ahead, at 11 a.m. in Mannheim.

The German economy shrank for the first time in almost four years in the three months through June as faster inflation curbed spending power and a stronger euro and weaker global demand weighed on exports. The DAX benchmark share index has lost a fifth of its value this year. Still, oil prices have dropped 20 percent from their record $147.27 a barrel on July 11.

``Recession fears have increased and that's why the growth outlook is very uncertain,'' Sebastian Wanke, an economist at Dekabank in Frankfurt, said in an interview with Bloomberg Television. ``We expect a modest recovery, however.''

Gross domestic product, which fell 0.5 percent in the second quarter from the first, will grow just 0.1 percent in the three months through September, the Berlin-based DIW economic institute predicted yesterday.

``In view of the very small growth expectation, negative values are within the range of the forecast,'' the DIW said. Two consecutive quarters of contraction ``would meet the definition of a recession in a strictly technical sense.''

Strong First Quarter

The German government has reiterated its 2008 growth forecast of 1.7 percent. The economy expanded 2.5 percent in 2007 and 1.3 percent in the first three months of this year.

In the 15-nation euro-region economy, which contracted 0.2 percent in the second quarter, consumer and executive confidence in the outlook fell by the most since the Sept. 11 terrorist attacks last month. European manufacturing and service industries probably shrank a third month in August, a Bloomberg survey shows.

Tognum AG, the German diesel-engine maker that former owner Daimler AG is reinvesting in, on Aug. 12 scaled back 2008 sales and margin forecasts after a declining dollar and slowing economic growth led to a drop in second-quarter orders. BASF SE, the world's largest chemical producer, said last month that the euro's strength is ``gradually becoming a burden.''

Euro's Decline

The currency, which reached a record $1.6038 on July 15, has gained 9.4 percent over the past year, making exports less competitive abroad just as the U.S. economy, the world's largest, grapples with a worsening housing slump.

The euro dropped almost 8 cents after European Central Bank President Jean-Claude Trichet on Aug. 7 said growth will be ``particularly weak'' through the third quarter.

The gloomy growth outlook and declining oil prices may stop the central bank from raising rates further. Eonia forward contracts show investors have scaled back bets on higher rates. The yield on the December contract was at 4.22 percent yesterday, down from 4.43 percent a month ago.

The ECB raised its benchmark rate by a quarter point to 4.25 percent in July after inflation accelerated to 4 percent, the fastest pace in 16 years and double the bank's 2 percent limit.

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net