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Germany

Key Indicator Sparks Fears of a German Economic Slowdown

German investor confidence dropped sharply in June, a key indicator released Tuesday showed, flaming fears of an economic slowdown. A surging euro and spiralling inflation have begun to affect Europe's biggest economy.

Man standing in front of a line graph

Investor confidence fell faster than forecast

Economists had forecast a drop in the ZEW index in June to minus 42.5 points. Tuesday's report, drawn up by the Mannheim-based Centre for European Economic Research, showed a further slide than anticipated, to minus 52.4 points from minus 41.4 points in May.

Based on the responses of 264 analysts and institutional investors, the ZEW indicator is considered a preview for the release later this month of Germany's closely watched Ifo business confidence index.

Declining orders, inflation fears driving drop

Man walking through grocery store, holding basket filled with food

Rising food prices contributed to concerns

The ZEW institute cited two major causes for the slip.

"On the one hand, repeatedly decreasing incoming orders indicate that Germany's momentum will lose steam in the next six months," said ZEW president Wolfgang Franz during a presentation of the survey.

"On the other hand, continuing price increases for energy and food are reducing the purchasing power of consumers," he added. "The expectations of the financial market analysts are strongly influenced by the current forecast of a weaker economic momentum in 2009."

Concerns have likewise been mounting about the impact of soaring inflation on both consumers and businesses. The European Union's statistics office on Monday revised the May inflation rate in the 15-member euro zone to a 16-year high of 3.7 percent.

Fears of an interest rate hike caused concern earlier this month after European Central Bank chief Jean-Claude Trichet had placed investors on notice. Renewed inflationary pressures, he said, meant that the bank's 21-head governing council was sizing up a rate hike of up to 25-basis points when it meets in early July.

Fears of a backsliding economy

Euro symbol in front of skyscraper

The European Central Bank warned of an interest rate hike

All of this comes against the backdrop of expectations that despite a strong start to the year, the German economy may backslide as 2008 unfolds.

"The upswing will lose significant drive in the coming 12 months," said Germany's Chamber of Industry and Commerce (DIHK) when it released its latest survey of members on Monday.

Still, despite the more downbeat mood emerging from its survey, the DIHK joined other groups in raising its German growth forecast for 2008 to 2.3 percent from a previous estimate of 2.0 percent.

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