German investor confidence dropped unexpectedly on concerns over higher inflation, a stronger euro, and continued weakness in U.S. housing. The ZEW centre for European Economic Research showed a drop in its confidence index from -40.7 in April to -41.4 in May. Analysts were expecting the index to rise to -37. Bloomberg:
“Analysts are less certain that the European Central Bank will lower interest rates because the inflation outlook remains a concern,” Sandra Schmidt, an economist at ZEW, said in a Bloomberg Television interview. “They are also concerned that continuous high prices will damp consumer spending.”
Germany’s economic outlook has deteriorated as record food and oil prices sap consumers’ purchasing power, the U.S. teeters on the brink of a recession and the euro breached $1.60 last month, hurting export competitiveness. The single currency rose today after the head of ZEW, Wolfgang Franz, said the ECB may have to ignore the economy’s weakness and even increase interest rates as inflation accelerates.
German consumer prices rose 2.6 per cent in April from a year earlier after jumping 3.3 per cent the previous month, the most in 12 years. German produce prices gained the most in more than two years in April, increasing 1.1 per cent, led by energy costs, the Federal Statistics office said today. The ECB aims to keep inflation in the euro region just below 2 per cent.
The ECB left its benchmark rate at 4 per cent this month, citing “strong short-term upward pressure on inflation.” ECB President Jean Claude Trichet said that “at the same time, the economic fundamentals of the euro area are sound,” pointing to moderating “but ongoing” growth.
“The economic situation in Germany is still robust overall,” said Thorsten Polleit, chief Germany economist at Barclays Capital in Frankfurt.