German investor sentiment drops in April

The recovery prospects for the German economy, Europe's biggest, took a knock Tuesday when data showed that investor sentiment falling more than expected this month. The widely watched investor confidence index calculated by the ZEW economic institute fell by 12.2 points to 36.3 points in April, after topping a three-year high last month. It was the first time since November that the index has fallen. Analysts had been projecting a more modest decline to around 43 points. ZEW argued the setback was a correction to the recent sharp increases. "Despite its decline, the indicator currently hovers at its third highest mark within the last 24 months. The current level has only been exceeded in the two preceding months," the think tank said. "Basically, the surveyed financial market experts remain confident, but are less optimistic than they have been in the previous month. The decline in economic sentiment is consistent with the release of economic data that fell short of expectations" said ZEW president Clemens Fuest. 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 4.4 points to 9.2 points in April. A frequent criticism against the ZEW index is that it can be volatile and is therefore not particularly reliable. "April's fall in the ZEW index highlights investors' fears that the German recovery will be short-lived," said Capital Economics economist Jennifer McKeown. The expert acknowledged that the index is still at a comparatively high level. "And if the latest drop was related to fears about Cyprus, sentiment could recover once the dust starts to settle," she ventured. "But given growing fears about troubles in Slovenia, Portugal and Italy and their impact on the German economy and public finances, we suspect that further falls in sentiment are to come," McKeown warned. "While we still see Germany easily outperforming the rest of the eurozone this year, we think that a strong and sustained recovery is too much to hope for," she added, predicting the German economy will "stagnate this year and grow by just 0.5 percent in 2014." Carsten Brzeski of ING bank suggested that "new uncertainty stemming from the euro crisis and doubts about the strength of the Chinese economy seem to have dented analysts' optimism." However, "it only looks like a correction at a level still consistent with modest growth. The big confidence collapse some had expected after the Cypriot bailout has so far failed to appear," he said. Berenberg Bank economist Christian Schulz put the drop in the ZEW down to the "chaos surrounding the Cyprus bailout in late March." After the overly optimistic improvement in sentiment early this year, the latest ZEW reading "should be interpreted more as a correction of investors' optimism rather than a clear deterioration in Germany's economic outlook," Schulz said. "Moreover, one should not forget that the sentiment index still remains firmly in positive territory. All in all, we will await the release of the Ifo business climate index next week for stronger evidence on the economic outlook for the second quarter," Schulz concluded.