Investor sentiment in Germany worsened by far more than expected in July, hurt by a surge in oil prices and sliding stock markets, a survey by the ZEW economic research institute showed today.
The Mannheim-based ZEW said its economic expectations indicator for Germany, based on a survey of 293 analysts and institutional investors, fell for a sixth straight month to 15.1 from 37.8 in June, the biggest monthly drop in almost 4 years.
Bund futures jumped on the news and the euro fell to its lowest in nearly a month against the dollar, reversing earlier gains.
Predictions ranged from 15.0 to 45.0. The index's historical average is 35.2.
David Brown, chief European economist at Bear Stearns in London, said rising crude costs, the prospect of further rate hikes by the European Central Bank (ECB) and declining stocks were taking a toll on sentiment.
"It shows there could potentially be a crisis a confidence about the durability of German recovery going forwards, which the ECB will have to pay some regard to at some stage," he said.
"But it will not prevent the ECB from tightening again at the August 3rd rate policy meeting," he added.
Oil prices have jumped more than two per cent since the start of July and crude leapt to a record $78 a barrel on Friday amid escalating violence in the Middle East.
Germany's Dax index of leading shares has shed almost five percent since the end of June, compared with a drop of just over three percent suffered by the FTSEurofirst index of major European stocks.
The ZEW said its gauge of current conditions for Germany rose to 23.3 this month from 11.9 in June, beating expectations. The Reuters consensus forecast was for a rise to 14.0.
"The future development of the German economy is subject to considerable risks," the ZEW said in a statement. "First of all, the skyrocketing oil price has negatively affected business expectations.
Furthermore, exports are expected to decline in light of the economic downturn of the US economy and a strong euro."
ZEW economist Matthias Koehler said the current conditions component could increase further in the autumn, whereas expectations were likely to remain at around the same level or could fall further.