German investor confidence hits lowest level in 21 months

German investor confidence dropped to the weakest in 21 months amid increasing political tension in Europe, even as the European Central Bank steps up its stimulus.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict economic developments six months in advance, fell to 6.9 in September from 8.6 in August. That’s lowest level since December 2012.

The gauge has decreased every month since December when it reached a seven-year high. Economists forecast a drop to 5, according to the median of 33 estimates in a Bloomberg News survey.

The German economy, Europe's largest, contracted in the three months through June and Bundesbank president Jens Weidmann said an expansion in the second half of the year may be weaker than previously predicted. The ECB cut interest rates to record lows this month and announced an asset-purchase program after euro-area economic growth stalled and inflation slowed to the weakest pace since 2009.

"The downward trend of the ZEW indicator of economic sentiment for Germany has slowed significantly," said ZEW president Clemens Fuest. "However, the economic climate is still characterized by great uncertainty. The risk of a sanction spiral with Russia continues to exist and economic activity in the eurozone remains disappointing."

A measure of the current situation fell to 25.4 from 44.3, today's report showed. The survey of 234 analysts was carried out September 1st-15th, ZEW said. An index of expectations for the euro area declined to 14.2 from 23.7. The euro was little changed at $1.2945 at 11:29 a.m. Frankfurt time. The DAX Index of stocks was down 0.4 per cent at 9,622.88. "There's a lack in confidence because of political risks from Ukraine and Scotland, " said David Milleker, chief economist at Union Investment GmbH in Frankfurt.

“We can’t expect a growth spurt anytime soon but the fundamentals are alright and the start into the third quarter wasn’t bad.”

European Union and US officials agreed last week to stiffen sanctions against Russia because of its support of separatists in Ukraine.

Polls show that a September 18th vote on Scottish independence from the UK is too tight to call.

A vote for separation could lead to capital flight from Scotland, according to a Bloomberg survey of economists. Growth Outlook The Bundesbank predicted in June that the German economy will expand 1.9 per cent this year and 2 percent in 2015.

While industrial production grew more than forecast in July and factory orders surged the most in more than a year, the Frankfurt-based central bank may have to reduce its full-year projections to “somewhere in the range of 1.6 percent,” Mr Milleker said.

Reuters