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German Business Sentiment Sinks on Credit Worries

Reuters
Tuesday, 21 Aug 2007 | 7:45 AM ET

A global credit crunch pushed German investor morale to its lowest level in eight months in August, raising pressure on the European Central Bank (ECB) to keep interest rates on hold for the time being.

The ZEW think-tank said on Tuesday that its economic sentiment indicator, based on a survey of 291 analysts and institutional investors, fell to -6.9 this month from 10.4 in July. A Reuters poll of economists had pointed to a reading of -1.0.

The survey was conducted between July 30 and August 20, when international financial markets were reeling from fears about a global liquidity crisis. The drop in the headline reading was the third in a row and the biggest since August 2006.

"This puts on ice any intention to hike (ECB) rates in September and it should underline that euro zone rates have peaked," said David Brown at Bear Stearns International.

Call for Patience

ZEW President Wolfgang Franz, who is also one of the German government's top economic advisers, urged the ECB to be patient. "I would encourage the ECB to keep interest rates stable and wait until the current (market) crisis is over," Franz said.

A separate ZEW gauge of current conditions for Germany fell to 80.2 this month from 88.2 in July. The consensus forecast was for a reading of 85.0. A measure of expectations for the euro region fell to -6.1 after 7.2 the previous month, the ZEW said.

Franz said potential problems stemming from the U.S. subprime mortgage market were likely to be limited for the German economy, Europe's largest, although exports might suffer from U.S. households' weaker purchasing power.

"It's clear the credit turmoil ... is no longer a matter restricted to the United States, but something which is having a global impact," added DZ Bank economist Bernd Weidensteiner.

"The trouble is unlikely to have much of an impact on German growth in the third quarter, but we'll have to see how it affects the economy in the fourth quarter or the start of next year," Weidensteiner said.

Real Economy

German economic growth slowed to 0.3% on the quarter in the April-June period from 0.5 % in the first three months of 2007, held back by a fall in construction investment.

Foreign trade and equipment spending was, however, brisk in the second quarter and the German exporters' association said last week export business was not being hurt by the fears of a global liquidity crisis that have knocked financial markets.

Some economists played down the significance of the fall in the ZEW reading. "This is more a matter of psychology than fundamental facts. A meltdown for the German economy is not in the cards," said Andreas Rees at UniCredit.

Sebastian Wanke at DekaBank added: "I think it's too early to say the credit crunch is damaging the real economy. But the outlook for the real economy is certainly not better."

German companies have generally remained upbeat. "Global growth remains very robust," industrial conglomerate ThyssenKrupp said this month when reporting record quarterly pre-tax profit in the three months to June.

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