German Investor Sentiment Drops


German investor confidence declined for a second straight month as rising inflation, the euro's near-record strength and high oil prices ate into expectations, a closely watched survey showed Tuesday.

The ZEW institute's monthly index measures investors' expectations for the German economy-Europe's biggest-over the next six months.

It dropped to minus 41.4 points in May from minus 40.7 points in April and from minus 32 in March.

The decline was worse than the minus 37 points analysts polled by Dow Jones Newswires had predicted.

The May figure was below its historical average of plus 29.6 points.

It was the second monthly drop and followed two consecutive monthly rises in February and March.

In a statement, the Mannheim-based group said that May's findings were influenced by fears of inflation which offset rising sentiment that Germany's export industry was solid.

"On the one hand, economic expectations for the next six months for the United States and consequently also for the German export industry have increased considerably," it said. "On the other hand, inflationary risks remain high. This should negatively affect private consumption in Germany."

ZEW president Wolfgang Franz said that, ultimately, Germany's economy could lose speed, too.

"German firms were very successful in the first quarter of 2008. However, the economic momentum should gradually lose speed because of increasing refinancing costs and a strong euro," he said. "This should have a negative impact on firms."

The euro reached new highs in the last month, going to $1.6018, before falling back.

On Tuesday, one euro bought $1.5596.

The high euro raises the prospect of European goods becoming less competitive overseas, reducing exports - a key element of Germany's current economic upswing.

It is also likely to keep the European Central Bank firmly entrenched, with interest rates on hold at 4 percent in the coming months, too.

However, despite the concern, the survey found that current economic conditions were viewed more favorably, with the indicator rising to 38.6 points from 33.2 points in April.