German Investor Confidence Rises to Three-Year High

By Simone Meier

June 16 (Bloomberg) -- German investor confidence rose more than economists forecast to a three-year high in June after evidence emerged that the recession in Europe’s largest economy is bottoming out.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months ahead, increased to 44.8 from 31.1 in May. That’s the highest reading since May 2006. Economists expected a gain to 35, according to the median of 35 forecasts in a Bloomberg News survey.

There are signs Germany’s worst economic slump since World War II is easing. The pace of contraction in the manufacturing industry is slowing and business confidence has started to improve. The benchmark DAX Index has gained 35 percent since touching a five-year low three months ago. Still, the government expects the economy to shrink 6 percent this year.

“Although today’s ZEW index is good news, the growth expectations of most financial analysts seem to be overhasty,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. “The recent stock market rally seems to have obscured the weak state of the backbone of the German economy.”

The euro rose a third of a cent to $1.3922 after the report. A gauge measuring investors’ assessment of the current economic situation rose to minus 89.7 from minus 92.8 in May, ZEW said.

‘Improved Mood’

Germany’s Daimler AG, the world’s second-biggest maker of luxury cars, said improving consumer sentiment may boost sales by the end of the year. An “improved mood” may already be developing among high-end auto buyers, Chief Executive Officer Dieter Zetsche said on June 5 in St. Petersburg, Russia.

German Chancellor Angela Merkel’s government has pledged to spend about 85 billion euros ($117 billion) in an effort to rekindle growth, including tax breaks and a 2,500-euro payment for consumers who scrap their old car and buy a new one.

The European Central Bank this month held its key interest rate at a record low of 1 percent. It has announced plans to purchase 60 billion euros of covered bonds and lend banks as much money as they need for up to 12 months to help revive lending.

“I’d warn against a premature exit strategy,” ECB council member Ewald Nowotny, who heads Austria’s central bank, said at a conference in Vienna late yesterday. “We are still in a crisis. The primary goal should be to restore economic growth as fast as possible.”

‘Not Out of The Woods’

Deutsche Bank AG Chief Executive Officer Josef Ackermann said on June 11 he sees encouraging signs of a global economic recovery “at a modest level.” Still, “we’re not out of the woods,” the head of Germany’s largest bank said.

Commercial banks in the 16-nation euro region may lose a further $283 billion by the end of next year as the financial crisis forces them to write off bad loans, the ECB said yesterday.

The Bundesbank on June 5 predicted German unemployment will rise to 10.5 percent next year from 8.2 percent currently, even after monetary and fiscal stimulus “help the economy to find its feet in the summer months of 2009.”

“Despite a mild recovery in the course of the year, the outlook for 2010 remains for a low level of economic activity,” it said.

Continental AG, Europe’s second-largest car-parts maker, said on June 5 it may eliminate as many as 2,600 of its 27,000 German jobs by the end of 2010 to counter a drop in demand. The Hanover-based company cut 6,000 jobs in the first quarter.

Volkswagen AG, Europe’s largest automaker, said on June 12 that “very weak” global car markets aren’t yet recovering, even as the company’s sales rose in May for the first time in eight months thanks to government incentives.

“The rate of economic contraction across the euro zone is moderating appreciably and business confidence has risen,” said Howard Archer, chief European economist at IHS Global Insight in London. Still, “economic activity will remain too weak to actually generate jobs until well into 2010.”

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