MANNHEIM, Germany - The global financial crisis hammered German investor morale in October but there were signs a government banking rescue package could help stop the rot, a closely watched survey showed on Tuesday.
Michael Schroeder, economist at the ZEW economic research institute which produced the survey, said the report indicated Europe's biggest economy would contract in the second half of 2008 and going into the first quarter of 2009.
‘This looks pretty much like a recession,’ he said.
The ZEW gauge of expectations for Europe's biggest economy, based on a survey of 256 analysts, plunged to -63.0 from -41.1 in September, falling close to July's all-time low of -63.9 and undershooting the -51.1 reading expected by economists.
ZEW conducted the survey from Sept. 29 to Oct. 13. It said a separate analysis of 39 responses received on Oct. 13, the day the government presented details of the banking rescue package, showed the deterioration in sentiment was less pronounced.
‘Investor confidence has clearly been shattered by the full fallout of the recent financial turmoil,’ said ING analyst Carsten Brzeski.
‘Today's ZEW indicator simply reflects the recent storm on financial markets and should not mark a new downward trend in investor confidence,’ he added.
A separate gauge of analysts' assessment of current conditions fell to -35.9 in October, the lowest since Dec. 2005, from -1.0 the previous month, ZEW said. The consensus forecast in the Reuters poll was for -15.0.
Euro zone government bond futures hit session highs after the release of the data.
RECESSION LOOMS
The German economy shrank in the second quarter and another contraction in the July-September period would push it in recession -- widely defined as two or more consecutive quarters of declining gross domestic product.
Leading economic research institutes on Tuesday slashed their joint forecast for German economic growth in 2009 to 0.2 percent from a 1.4 percent prediction made in April.
‘The recent dramatic escalation of the financial market crisis further clouds the outlook for economic activity,’ the eight think tanks -- five from Germany, two from Austria and one from Switzerland -- said in a statement.
Jennifer McKeown at Capital Economics said the ZEW data did little to change the picture of a weakening euro zone economy.
‘In all, there is nothing here to prevent aggressive policy loosening by the ECB,’ she said.
The European Central Bank cut interests rates by a half percentage point to 3.75 percent last week in a coordinated global round of rate cuts. The Group of Seven economic powers followed up with a pledge to prevent big banks from collapse.
On Monday, the German government approved its banking rescue package, worth up to 500 billion euros ($680.9 billion), to try to restore confidence to Germany's battered financial sector. Stocks rose on Monday, and again on Tuesday.
The 39 survey answers to the ZEW survey received since the banking package was announced had an average reading for the expectations gauge of -50.0, said ZEW's Schroeder.
‘It's still quite negative but it's a bit better than the overall figure,’ he said. ‘The package helps banks but not necessarily the business cycle.’
In a sign German companies are suffering from a weaker global economy, carmaker BMW said last Friday it would temporarily halt output at some German plants given the sharp drop in demand in key car markets.