–Adds Comments From ZEW Expert, Details From Survey

Germany Expectations Current Conditions
————————————————————-
December -53.8 +26.8

MNI survey median: -57.0 +32.0
MNI survey range: -62.0 to -50.0 +25.0 to +37.5

November -55.2 +34.2
—

FRANKFURT (MNI) – Investors’ expectations for the German economy in
the coming six months unexpectedly improved in December, while
perceptions of current developments remained on a downward trend, the
Centre for Economic Research (ZEW) reported on Tuesday.

After nine consecutive months of decline, the ZEW’s economic
sentiment indicator recovered 1.4 points in December to -53.8 — still
well below the historical average of 24.6.

“The economic sentiment for Germany seems to have bottomed out,”
ZEW President Wolfgang Franz said in a press release.

“The decisions of the latest EU summit may have improved the
experts expectations,” Franz continued. “Subject to a consensus on
crucial details, these decisions are an important step towards an
efficient institutional framework for the currency union.”

A sectoral analysis showed the strongest improvement in
construction, said ZEW expert Michael Schroeder. Basic goods like
chemicals also recovered, “but it might be because of the low interest
rates as well.” By contrast, expectations for export-oriented sectors
deteriorated, he noted.

While the medium-term outlook improved, investors were less
positive regarding the present economic situation, knocking the
sub-index down 7.4 points to 26.8, its lowest level since July 2010.

Other economic indicators have been more promising. Retail sales
hit a 33-month high in October, while expanding employment and rising
wages suggest that private consumption will continue to bolster
activity.

The recovery in industry output and the rebound in export orders in
October and the unexpected improvement in the Ifo business sentiment
indicator last month also support the notion that the German economy may
yet avoid a full-blown recession.

“The probability that we have a technical recession has decreased
now,” Schroeder said. “It shouldn’t be a recession, but a very bad 1Q
2012 in Germany and should improve afterwards. Maybe there is some
probability for a real recession, but it’s more important that most of
economic advisors see the bottom reached.”

However, the Ifo survey also showed that sentiment in manufacturing
and retailing eroded further in November, while construction morale
remained weak.

Moreover, the fact that Germany’s composite PMI slipped into
contraction territory (49.4) in November for the first time in over two
years shows that it is still too early to sound the all-clear.

The ongoing debt crisis, through its dampening effect on confidence
and the austerity measures in key trading partners, will inevitably
undermine demand for German products.

“Weaker confidence and substantial losses in equity markets may
also lead households to raise their savings rate, which may weigh on
consumption and partly offset an increase in disposable income,” the
European Commission cautioned late last month.

The Commission expects GDP growth to slow sharply from 3.0% this
year to 0.6% next year before picking up to 1.9% in 2013.

“The recovery from the period of weak growth is envisaged to
continue through 2013 and is likely to be stronger than in other euro
area countries because in Germany there is no need for deleveraging in
either the household or corporate sectors,” the Commission said.

The Bundesbank has also slashed its projection for domestic GDP
growth in 2012 to 0.6%.

For the Eurozone as a whole, the ZEW’s six-month outlook also
recovered in December to -54.1 from -59.1 in November. Conversely, the
current situation component fell for the sixth consecutive month to
-44.1 after -39.8.

Analysts were on balance more bullish for the dollar, as over 40%
expected it to appreciate against the euro. Nearly 58% expected Eurozone
short-term interest rates to decline, up 7.1 points from the November
survey.

Signaling a further deterioration in investors’ sentiment towards
the Eurozone, the Sentix index fell for the fifth consecutive month in
December, as both the current conditions and the expectations weakened.
Investors cited the worsening debt crisis and rising borrowing costs in
a number of Eurozone states as main concerns.

— Frankfurt bureau: +49 69 720 142; email: frankfurt@marketnews.com —

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