–Expectations at Lowest Level since April 2009
–Current Conditions Far Better Than Forecast

Germany Expectations Current Conditions
————————————————————–
July +21.2 +14.6
MNI survey median: +25.1 -1.5
MNI survey range: +20 to +40.0 -4 to +1
June: +28.7 -7.9

—

MANNHEIM, Germany (MNI) – Investors’ and market participants’
six-month outlook for the German economy declined more than generally
expected in July, as worries about the sustainability of the recovery
and the financial crisis weighed on sentiment, the ZEW survey showed
Tuesday.

The expectations index fell 7.5 points to 21.2, undershooting the
forecast survey median of 25.1 and falling short of the index’s
long-term average of 27.4.

“The considerable improvement in the economic situation together
with the decline in expectations signals that – until the end of this
year – the potential for further improvements of the German economy
seems to be widely used up,” ZEW said.

“Particularly the crisis in sovereign debt and the resulting need
for consolidation of budgets in various countries seem to have
contributed to the subdued economic expectations,” ZEW added.

“Contrary to the positive assessment of the current economic
situation, financial experts expect that the dynamics in German business
activity will slow down towards the end of this year due to still
existing uncertainties regarding the handling of the crisis of financial
markets and the crisis of sovereign debt,” explained ZEW President
Wolfgang Franz.

The index for current conditions in Germany recovered another 22.5
points to 14.6, unexpectedly returning to positive territory for the
first time since July 2008.

Near-term trends in the index, which is based on investor
assessments and thus particularly sensitive to financial market
developments, are likely to be influenced by the impact of bank stress
test results on confidence.

Publication of stress test results for each of the 91 EU banks
under review is scheduled for July 23. According to information made
available thus far, test scenarios include a 3% drop in GDP as well as
another sovereign bond crisis but no sovereign default.

While authorities expect the exercise will be
“confidence-building”, as ECB President Jean-Claude Trichet said
Thursday, markets are yet to be convinced.

Analysts have warned that scenarios to be tested do not appear
tough enough. Tests that appear too soft, a sketchy release of results,
or a failure to recapitalize banks in need might kindle concerns about
what is still hidden on banks’ balance sheets and raise doubts about
Europe’s commitment to clean up its banking system.

Signals from the real economy justify the renewed rise in the
assessment of current conditions. Following strong data in the second
quarter, the Bundesbank has revised up its GDP growth forecast for this
year to 1.9% from 1.6%, while the Ifo institute has hiked its forecast
to 2.1% from 1.5%.

However, the erosion in analysts’ six-month expectations points to
weaker growth in the months ahead, no doubt reflecting the impact of
austerity measures in Germany’s Eurozone trading partners and a
potential slowdown in China and the U.S. on the recent export boom.

“In the second half, it is very likely that we will see a
deceleration” of growth, European Central Bank Executive Board member
Juergen Stark said Friday, while dismissing fears of a double-dip
recession.

The ZEW’s index of economic expectations for the Eurozone declined
by 8.1 points in July to 10.7. The index for current conditions rose by
14.3 points to 26.5.

ZEW said 287 analysts and institutional investors participated in
its survey conducted from June 28 to July 12.

–Frankfurt bureau tel.: +49 69 720 142. Email: frankfurt@marketnews.com

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