German investor morale dropped to its weakest in nearly three years in October and economists said the escalating euro zone debt crisis threatens to push Europe's leading economy back into recession.
The ZEW think tank's monthly survey showed economic sentiment dropping to -48.3 from -43.3 in September, a deeper drop than a Reuters poll consensus forecast of -45.0 and sending the euro to a session low against the dollar.
This was the eighth consecutive decline and the lowest level since November 2008, just after the collapse of Lehman Brothers and as the global financial crisis escalated.
"It seems that there might be a chance of a very soft recession," said ZEW economist Michael Schroeder. The crisis is one of the main drags on sentiment and may lead German consumers and firms to postpone investments and spending, he said.
"The forecast based only on our expectations sentiment indicator is negative year-to-year growth for the fourth quarter and first quarter next year for Germany."
Some economists feared more than just a soft, short recession.
"The expectations are consistent with a recession in Germany and the euro zone in the fourth quarter of 2011 and first quarter of 2012," said Berenberg Bank's Christian Schulz.
"Unless a solution to the crisis is found, confidence is unlikely to return quickly and the recession may become deeper and more protracted."
Germany's export-driven economy has recovered swiftly from the financial crisis, outperforming its peers and providing a crucial growth engine for Europe.
But recent indicators show German expansion easing due to a global slowdown. Industry output and orders slumped in August. Forward-looking indicators are also gloomy. The influential Ifo business climate, due out on Friday, is expected to fall in October for the fourth month in a row.
Analysts have long feared the slowdown and the European debt crisis would hit German exports, and recent data has dashed hopes that domestic demand could sustain a recovery. Retail sales fell at their fastest pace in more than four years in August, and industry orders slid on a drop in domestic demand.
The greatest risk now to Germany's economy is a worsening of the euro crisis, leading institutes said last week, as they slashed their forecast for 2012 growth to 0.8 per cent.
Nonetheless, the institutes forecast 2.9 per cent growth for 2011 due to a strong start to the year, and some analysts said on Tuesday sentiment was worse than the economic reality.
"Scepticism on the coming six months has increased," said Postbank's Heinrich Bayer. "We are facing a very difficult half year. We will hardly get beyond stagnation.
"But ... the mood is worse than the (actual) situation. Therefore the blip will not lead to a recession," he added.
Germany's government will publish its own growth forecasts on October 20th and a cabinet source told Reuters today they would be in line with those of the institutes.ZEW's Schroeder said most analysts did not expect a change in euro zone interest rates in the next six months.
However the number of economists expecting a rate cut had risen strongly.
The ZEW index, which precedes Germany's influential Ifo survey, rated current conditions at 38.4, down from 43.6 in September and below a Reuters poll forecast for 39.6.
The ZEW survey was based on a survey of 271 analysts and investors and conducted between October 4th and October 17th.
Reuters
