German investor morale tumbles as contraction looms

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German investor morale fell sharply in October, new data showed on Tuesday, raising fears that the euro zone engine could contact in the third quarter of 2014.

Germany's ZEW index of economic sentiment fell into negative territory for the first time since November 2012 as pessimism mounted over the outlook for the euro zone's largest economy.

The ZEW index fell to -3.6 points versus 6.9 points in September. The euro fell to a day's low of $1.2666 following the data. ZEW, an influential center for European economic research, said the disappointing figures concerned incoming orders, industrial production and foreign trade.

"[Disappointing data] have likely contributed to the growing pessimism among financial market experts," ZEW President Professor Clemens Fuest remarked on the figures.

"ZEW's financial market experts expect the economic situation in Germany to decline further over the medium term. Geopolitical tensions and the weak economic development in some parts of the euro zone, which is falling short of previous expectations, are a source of persistent uncertainty," he added.

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The ZEW Indicator of Economic Sentiment for the euro zone also decreased in October. The indicator declined by 10.1 points compared to the previous month, reaching 4.1 points.

The index's results will compound fears that Germany's economy, previously seen as the "strongman" of the euro zone, has started to falter. Last week, data showed that industrial output had fallen far more than expected in August and posted the biggest drop since early 2009.

The figures have led some to believe that the German government will soon cut its economic growth forecasts for 2014 and 2015, according to two sources in the ruling coalition cited by a Reuters report last week, one of whom said the growth outlook for both years would be cut to about 1.25 percent.

Germany's economy contracted by 0.2 percent in the second quarter and investors will now be looking to third quarter gross domestic product (GDP) data to see whether the economy has contracted further.

Jennifer McKeown, senior European economist at Capital Economics, said the ZEW index will intensify pressure on the European Central Bank (ECB) "to implement a broad quantitative easing program even while other major central banks prepare to scale back their policy support."

She said that recent "disappointing weakness of the German hard data is more than just a blip."

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