Ukraine hits German investor confidence

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Investment sentiment in Germany fell to the lowest level for nearly two years in August amid concern about the economic fallout from crises such as the tension over Russia-Ukraine, data showed on Tuesday.

The widely watched investor confidence index calculated by the ZEW economic institute fell by 18.5 points to 8.6 points in August, its lowest level since December 2012, it said in a statement.

It was eighth monthly decline in a row and the sharpest since June 2012. Analysts had been projecting a much shallower drop to 18 points.

“The decline in economic sentiment is likely connected to the ongoing geopolitical tensions that have affected the German economy by now,” ZEW said.

The institute did not name the trouble spots specifically, but the German economy ministry said in a report earlier that the Russia-Ukraine crisis is hurting Europe’s top economy, as well as the turmoil in the Middle East.

“In particular, current figures on industrial production and incoming orders suggest markedly reduced investment activities on the part of German firms against the backdrop of uncertain sales prospects,” the statement continued.

“Since the economy in the eurozone is not gaining momentum either, the signs are that economic growth in Germany will be weaker in 2014 than expected.”

For the survey, ZEW questions analysts and institutional investors about their current assessment of the economic situation in Germany, as well as their expectations for the coming months.

The sub-index measuring financial market players’ view of the current economic situation in Germany fell by 17.5 points to 44.3 points in August, its lowest level since January.

- Stagnating growth -

“The fact that the index is now barely positive means that only a very small majority of investors see economic conditions improving rather than deteriorating over the next six months,” said Capital Economics economist Jennifer McKeown.

“Admittedly, the recent decline in sentiment probably largely reflects fears about the effects of the Ukraine crisis, which could prove short-lived,” she said.

“But the more that confidence is damaged by geopolitical risks, the greater the threat to actual activity as businesses and consumers become reluctant to spend.”

Official gross domestic product (GDP) data for the second quarter are scheduled to be released on Thursday.

And following growth of 0.8 percent in the first three months, the new data “seem set to reveal that German GDP stagnated at best in the second quarter,” said McKeown.

- Shakier recovery -

The ZEW data “show that recovery of the German economy is on shakier legs that people would have thought until very recently,” said Postbank economist Heinrich Bayer.

“But as long as the current geopolitical tensions don’t escalate further, we predict that the German economy will continue to develop positively against in the near future.”

“The ZEW index is good at predicting turning points of the economic trajectory and the uninterrupted decline since the end of last year has well flagged the loss of momentum of the economy in the second quarter.

“However, the index is less good at gauging the extent of the subsequent economic swing,” said Berenberg Bank economist Christian Schulz.

“The drop in the ZEW index confirms the near-term downside risk for the German and eurozone economies emanating from the Ukraine crisis. That does not change the fundamentally positive outlook, however,” Schulz said.

“Germany remains in a strong position to capitalise on any sentiment improvements once the Ukraine crisis fades from the headlines, and many eurozone countries are enjoying the benefits of their reforms.

“Stronger growth in the US and other important export markets should more than offset the weakness in trade with Russia,” the expert concluded.

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