German ZEW index falls sharply as economic outlook deteriorates

German analyst and investor sentiment fell sharply in April, hit by fears that a deterioration of the euro zone crisis and a global slowdown, led by a weakening China, could take a heavy toll on Europe's biggest economy.

The Mannheim-based ZEW think tank said today its monthly poll of economic sentiment fell to 36.3 points from 48.5 in March.

The reading undershot predictions of 42.0 and sent the euro down against the dollar.

"There is increasing evidence that there are growth risks," ZEW president Clemens Fuest said.

"There has been some disappointing data coming from China, from US labour markets, from German exports. There have been some doubts about the strength of the recovery and some people think there is now confirmation of that."

He pointed to a particularly strong decline in export-related industries in Germany, such as the automotive sector.

Long resilient to the euro zone crisis, Germany's economy slowed in 2012 and output shrank by 0.6 per cent in the final quarter.

But economists expect it to avoid recession and to have returned to weak growth in the first three months of this year. Still, weak data in recent weeks has raised fears that Europe's powerhouse may be faltering.

Imports and exports fell sharply in February, and industrial output has been lacklustre. A significant slowdown in Germany could be a headache for conservative Angela Merkel who hopes to clinch a third term as chancellor in an election in September.

"The chickens are coming home to roost for economic confidence in Germany," said David Brown of New View Economics.

"The problems are starting to pile up for business, with the debt crisis in Cyprus, euro zone recession and slowdown in China all taking a greater toll on sentiment," he said, adding confidence that German businesss could shrug off downside risks was looking increasingly misplaced.

In addition, worries about the euro zone crisis have resurfaced with the focus on Portugal, which is having to rethink some austerity policies after a constitutional court ruling and Cyprus, which is being bailed out after a messy debate over how hard to hit depositors in its banks.

Italy also faces political uncertainty after an inconclusive election result. In what appeared to be a dig at the German government, Mr Fuest also said one underestimated risk factor was the debate about a banking union in Europe.

"These decisions are routinely postponed," Mr Fuest said. "These decisions do raise some doubts about the ability of the periphery countries to address the weakness of their financial sectors."

Germany, backed by allies like Austria, has called for a change in EU treaties to allow for a so-called banking union, raising questions about how fast it can be implemented.

The ZEW index was based on a survey of 243 analysts and investors conducted between April 2nd and 15th, ZEW said.

The institute said the indicator was hovering at its third highest mark in the last two years, despite the April decline.