German investor confidence drops sharply

German investor confidence has plunged this month amid eurozone debt strains and fears that austerity measures will dampen growth ahead, a closely watched survey indicated yesterday.

The volatile, forward-looking financial sector indicator compiled by the ZEW research institute lost 17.1 points to 28.7 points, well below an average analyst forecast for a modest drop to 42.5 points.

"Economic sentiment is weakened by the uncertainty about the future developments of the debt crisis and the perspective of necessary cuts in public expenditure in EU member countries," a ZEW statement said.

This was the lowest level for the index since April 2009, when it stood at 13 points, and represented "a worrying sign for the future," Capital Economics senior economist Jennifer McKeown commented.

It was also the sharpest drop since October 2008, she noted.

The survey of 279 analysts and institutional investors is now close to its long-term average of 27.4 points, while a separate indicator of the current situation rose for the 13th month running to minus 7.9 points.

"Despite the decrease of the economic expectations, the economic outlook still remains positive," ZEW said.

But it quoted president Wolfgang Franz as saying that "the current recovery is still fragile. Fiscal policy is therefore well advised to define necessary consolidation measures now, but not to implement them until 2011."

German Chancellor Angela Merkel last week unveiled an austerity plan which foresees more than €80 billion in spending cuts between next year and 2014.

Critics have warned the belt-tightening could stifle economic growth.

Ms McKeown said the ZEW survey was "another sign that fears about peripheral debt are damaging sentiment towards core eurozone economies".

She referred to debt in countries on the eurozone's periphery such as Greece, Ireland, Portugal and Spain.

ING senior economist Carsten Brzeski said the ZEW index showed Germany's recovery from its worst post-war recession "has been challenged by many unexpected events".

Although "second-quarter growth should be a real smash the good times will not last forever," he added.

The sentiment figures "don't signal a dramatic deterioration in economic conditions or even a double-dip scenario for Germany," UniCredit economist Alexander Koch said, referring to the possibility of a second recession.

But he said the debt crisis represented a "Sword of Damocles" looming over Europe in the coming months.