Germany Expectations Current Conditions
August +14.0 +44.3

MNI survey median: +22.0 +18.0
MNI survey range: +18 to +30.0 +15 to +30

July +21.2 +14.6

MANNHEIM, Germany (MNI) – Investors’ six-month outlook for the
German economy unexpectedly weakened further in August to a 16-month
low, reflecting the likely slowdown in activity after a surge in 2Q, the
ZEW research institute said Tuesday.

ZEW’s expectations index fell 7.2 points to 14.0. Most analysts had
expected a modest recovery. The median forecast in MNI’s survey of
analysts was 22.0. The indicator’s long-term average is 27.3.

“The current decrease of the economic sentiment indicates that the
enormous growth observed in the second quarter is unlikely to continue,”
ZEW explained. “Due to Germany’s dependence on exports, major risks for
economic growth arise from a weak development abroad, e.g. in the
Eurozone and the United States.”

“Given that economic growth worldwide looses momentum, the euphoria
about the growth rates in some branches makes financial market experts
feel uneasy,” commented ZEW President Wolfgang Franz. “Anyway, high
growth rates are always easier to realize from a low base level, though
with decreasing dynamics.”

By contrast, the index for current conditions spiked another 29.7
points to 44.3 — the strongest monthly increase since the series began
in 1991 — after leaping into positive territory in July after two years
of negative readings.

The results follow the record 2.2% jump in 2Q GDP announced Friday
— stronger than even the most optimistic analysts had expected. Economy
Minister Rainer Bruederle predicted afterwards that the economy would
grow “far more than 2% in 2010.” In June, the Bundesbank had forecast
growth of 1.9%.

“We have a net positive value for expectations and we translate
this into moderate growth in the second two quarters,” said ZEW’s Peter
Westerheide, deputy head of international financial markets research.
“Should this materialize, we should have growth above 3% in the full
year.” Even if domestic growth were to stagnate ahead, full-year GDP
would rise by around 3%, he added.

Westerheide noted that expectations for the retail sector have
risen substantially, pointing to stronger private consumption. He
ascribed this to better labor market prospects.

The Eurozone as a whole grew only 1.0% in 2Q, and austerity
measures and the looming slowdown in China and the U.S. are widely
expected to dampen the export-led recovery. Last week, the ECB reminded
that there could be some moderation in the pace of global expansion,
particularly in emerging economies.

Nevertheless, ZEW’s index of economic expectations for the Eurozone
rose 5.1 points in August to 15.8. The index for current conditions
gained 13.5 points to -13.0.

Looking ahead, ZEW’s sentiment index remains vulnerable to
financial market tensions. After a few weeks of calm, the Eurozone’s
sovereign debt crisis flared up again last week.

The spread between 10-year Irish bonds and the benchmark German
bund widened to 309.5 basis points on Monday from 255.0 a week earlier
due to rising concerns over the recapitalization of the Irish banking
system and the risks posed by high debts and deficits. Yield spreads for
other peripheral countries also started to widen again.

ZEW said 284 analysts and institutional investors participated in
its survey conducted from July 26 to August 16.

–Frankfurt bureau tel.: +49 69 720 142. Email:

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