German Investor Sentiment Slumped as Crisis Deepened

By Christian Vits

Oct. 14 (Bloomberg) -- German investor confidence dropped for the first time in three months in October, to near a record low, as the global credit crisis threatened to tip Europe into a recession.

The ZEW Center for European Economic Research said its index of investor and analyst expectations slumped to minus 63 from minus 41.1 in September. The gauge reached an all-time low of minus 63.9 in July. Economists expected a decline to minus 51.1, the median of 35 forecasts in a Bloomberg News survey shows.

``The financial-market turmoil is the main cause for the drop in the index,'' Sandra Schmidt, an economist at ZEW, said in an interview on Bloomberg Television. ``There's concern that it will spread to the real economy.''

Germany's benchmark DAX share index dropped 22 percent last week, the most on record, as concern grew that bank failures and a credit-market freeze will drag the world into recession. German growth will slow to 0.2 percent in 2009 from 1.8 percent this year, the country's leading economic research institutes forecast today. Still, stocks surged after governments in Europe agreed to support banks and shore up financial markets.

Germany will provide as much as 500 billion euros ($683 billion) in loan guarantees and capital to bolster its banking system, the country's biggest government intervention since the Berlin Wall came down in 1989.

Economic Contraction

The International Monetary Fund said last week growth will be ``particularly weak'' in industrialized countries.

French manufacturing confidence slumped in September to the lowest in 15 years as new orders dropped ``markedly'' and the economy probably fell into a recession, the Bank of France said today.

Deutz AG, a German maker of diesel engines for trucks and ships, yesterday cut its full-year sales forecast for a second time this year, saying the financial crisis has hurt demand in the U.S. and Europe and that growth in China is slowing.

``The crisis will increasingly affect the real economy,'' said Andreas Rees, chief German economist at UniCredit Markets & Investment Banking in Munich. ``Even with the rescue packages taken into account, analysts' growth expectations have significantly worsened. A technical recession is already clear.''

The German economy contracted in the second quarter and may not have recovered in the third as exports faltered and consumer spending waned. Business confidence dropped to the lowest level in more than three years last month.

Biggest Gain

German stocks surged yesterday after governments and central banks announced initiatives to battle the financial crisis. The DAX jumped 11 percent, the biggest one-day gain since its inception in 1988, and advanced a further 4.5 percent today.

ZEW said its index would have declined less -- to minus 50 -- based on the 39 survey responses it received yesterday.

Europe's economy may be cushioned by falling oil prices, the euro's retreat and lower interest rates.

``The German economy is in a better position to weather a downturn than five or six years ago,'' said Carsten Brzeski, an economist at ING Group in Brussels. ``The situation on the labor market is much better and there's still hope that private consumption may recover due to falling oil prices.''

Oil prices have almost halved since reaching a record $147.27 a barrel in July, boosting consumers' purchasing power, while the euro has dropped more than 14 percent over the same period, making European exports more competitive.

The European Central Bank and the U.S. Federal Reserve last week led a global round of rate cuts in response to the credit crunch, lowering their benchmarks by half a point to 3.75 percent and 1.5 percent respectively. Investors expect the ECB to reduce its key rate again by at least a quarter point by December, according to Eonia forward contracts.

``It's almost certain'' that the ECB will continue to lower borrowing costs, said Ralph Solveen, an economist at Commerzbank AG in Frankfurt. While ``there's hope that we're at the beginning of the end'' of the financial crisis, ``we'll still have a lot of economic concerns going forward,'' he said.

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