Tuesday, October 18, 2011

German Expectations Worsen

MANNHEIM, Germany—German economic expectations deteriorated to approach a three-year low in October as analysts fear that the European-debt crisis will put a brake on the country's economy and may drive it into a slight recession in the next six months, the Center for European Economic Research, also known as ZEW, said Tuesday.

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The widely watched ZEW index fell for the eighth consecutive month to minus 48.3 from September's reading of minus 43.3. The level was last this low in November 2008, after collapse of Lehman Brothers amplified the global financial crisis.

Fears the debt crisis will cause governments and households to rein in spending and companies to postpone investments drove the index lower this month, ZEW expert Michael Schröder said. But he said confidence could improve fast "if we see a solution to the euro zone's problems."

European leaders are working on new crisis-fighting measures they hope to present at a summit on Sunday. But Germany has cautioned against expecting a "definitive solution" this weekend. Experts polled by ZEW expect Germany's economy to contract slightly in the fourth quarter of this year and the first quarter of next year.

"October's decline in the German ZEW index provides further evidence that Germany is being hit hard by deteriorating export prospects and the euro-zone debt crisis," said European economist Ben May at Capital Economics in London. Other recent data also supports that the "German recovery is all but over," he said.

Berenberg senior economist Christian Schultz said the recession could be deeper and longer in the absence of a solution to the debt woes. "In the end the European Central Bank might be required to step in and credibly avert any market panic before confidence and growth can return in the euro zone."

ZEW surveyed 271 analysts and institutional investors. More expect the ECB to cut interest rates but they are still in the minority, Mr. Schröder added.

Half the respondents expect rates to remain steady in the next six months, down from about 70% the previous month while 37% of the respondents expect lower rates, versus 20% a month earlier.

The current conditions index fell to 38.4 from September's 43.6, which was the lowest reading since July last year. Experts had forecast a reading of 39.6 for October.

Write to Margit Feher at margit.feher@dowjones.com

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