German Investor Confidence Rose to Highest Since 2006 (Update2)

By Frances Robinson

Aug. 18 (Bloomberg) -- German investor confidence jumped to its highest level in more than three years in August after government stimulus and rising exports pulled Europe’s largest economy out of recession.

The ZEW Center for European Economic Research said its index of investor and analyst expectations rose to 56.1 from 39.5 in July. Economists predicted a gain to 45, according to the median of 35 forecasts in a Bloomberg News survey. That’s the highest since April 2006. The survey aims to predict economic developments six months in advance.

Germany’s economy expanded 0.3 percent in the second quarter, a report showed last week, bringing an end to the worst slump since World War II sooner than forecasters had expected. While rising exports and government programs may keep growth on track, higher unemployment threatens to restrain the recovery.
“The German economy is out of recession, but not out of the woods,” said Carsten Brzeski, an economist at ING Groep NV in Brussels. “In all the enthusiasm about the recent numbers and the near-term outlook, there are still some impediments to a real recovery, the most pressing one being the worsening labor market.”
The euro rose as much as 0.2 percent after the ZEW figures, climbing as high as $1.4154. It traded at $1.4119 at 12.25 p.m. in Frankfurt.

GDP Boost 

ZEW’s gauge of the current economic situation rose to minus 77.2 from minus 89.3 in July, an improvement that the Mannheim, Germany-based institute said was helped by last week’s GDP figures. A survey of 19 economists expected a reading of minus 85. The Economy Ministry has said its forecast for a 6 percent economic contraction this year may now be too pessimistic.

“The recent GDP development shows that the previous expectations of the financial-market experts have come true,” said Wolfgang Franz, president of the ZEW. “There is, however, no reason for euphoria. The German economy develops parallel to the world economy and should, hence, recover only gradually.”

Chancellor Angela Merkel, who faces national elections next month, is spending about 85 billion euros ($120 billion) in an effort to rekindle growth, including a 2,500-euro payment for consumers who scrap their old car and buy a new one. New vehicle registrations in Germany rose 22.8 percent in the first five months of the year from the same period in 2008, the statistics office said yesterday.
Volkswagen AG, Europe’s largest carmaker, this month forecast a 5 percent decline in 2009 sales, half the drop it had previously anticipated.

Stock Rally 

“In recent weeks there have been positive developments in equity markets, and signs global trade is improving, which helps Germany,” said Joerg Lueschow, an economist at WestLB in Dusseldorf, Germany. The country’s benchmark DAX share index has advanced 43 percent since March 6.
A record 83 percent of Germans predicted Merkel will serve a second four-year term after elections on Sept. 27, according to an Emnid poll published by Bild am Sonntag on Aug. 16. That compares with 9 percent of respondents who opted for Social Democrat Frank-Walter Steinmeier, the newspaper said.

Foreign demand for German goods is picking up as the global economy improves. Japan’s economy emerged from recession in the second quarter as well, expanding an annual 3.7 percent, and German exports jumped 7 percent in June from May, the most in nearly three years.

Global Economy 

All 13 of the industry subindexes tracked by ZEW, which range from banking to telecommunications, rose in August, according to today’s report.

“Sentiment is improving in the most export-centric sectors, like electronics, technology and machinery, which is significant as Germany is so export-dependent,” Andreas Rees, said an economist at Unicredit in Munich.

Exports will grow about 4 percent in 2010 after slumping 17 percent in 2009, the DIHK trade association said earlier today, citing a survey of German companies operating in more than 80 countries.

Unemployment Risk 

Still, with unemployment at the highest since 2007, there’s a risk the recovery will falter when stimulus programs expire. Germany’s “cash-for-clunkers” subsidy is due to run out at the end of the year, as is a similar program in neighboring France.

The number of people out of work increased 52,000 to 3.46 million on an unadjusted basis, the Nuremberg-based Federal Labor Agency said July 30.

The stronger euro could also hurt exports as it makes German goods more expensive abroad. Europe’s single currency has gained 13 percent against the dollar since February.
“The economy will weaken again in 2010, as we’re expecting a ‘W’ shaped recession,” Jean-Christophe Caffet, an economist at Natixis in Paris said. “Before things stabilize there will be another correction, although the second dip of the ‘W’ might not be as deep as the first.”

To contact the reporter on this story: Frances Robinson in Frankfurt at frobinson6@bloomberg.net