Grave business - my financial world

Investor confidence in Germany unexpectedly fell for a second month in May on concern faster inflation, the stronger euro and fallout from the U.S. housing slump will hurt economic growth.

The ZEW Center for European Economic Research said its index of investor and analyst expectations declined to minus 41.4 from minus 40.7 in April. Economists expected a gain to minus 37, according to the median of 41 forecasts in a Bloomberg News survey. The gauge reached a 15-year low of minus 41.6 in January. A negative reading means that pessimists outnumber optimists.

“Analysts are less certain that the European Central Bank will lower interest rates because the inflation outlook remains a concern,'' Sandra Schmidt, an economist at ZEW, said in a Bloomberg Television interview. “They are also concerned that continuous high prices will damp consumer spending.''

Germany's economic outlook deteriorated after record food and oil prices sapped consumers' purchasing power, the U.S. economy barely grew and the euro breached $1.60 last month, hurting export competitiveness. The currency rose today after the president of ZEW, Wolfgang Franz, said the ECB may have to ignore the economy's weakness and increase interest rates to curb inflation.

Faster Inflation

German consumer prices rose 2.6 percent in April from a year earlier after jumping 3.3 percent the previous month, the most in 12 years. German producer-price inflation accelerated to 5.2 percent in April, the fastest in almost two years, the Federal Statistics office said today. The ECB aims to keep inflation in the euro region just below 2 percent.

German central banker Axel Weber last week called for the ECB to again look at raising borrowing costs to temper inflation. Weber said he only expects a mild weakening in European economic growth and the German economy will expand at least 1.9 percent this year.

The ECB left its benchmark rate at 4 percent this month, citing “strong short-term upward pressure on inflation.'' ECB President Jean-Claude Trichet said that “at the same time, the economic fundamentals of the euro area are sound,'' pointing to moderating “but ongoing'' growth.

“The economic situation in Germany is still robust overall,'' said Thorsten Polleit, chief Germany economist at Barclays Capital in Frankfurt.

Current Optimism

A gauge measuring the current situation unexpectedly rose to 38.6 in May from 33.2 the previous month, ZEW said. Economists expected a decline to 32.

Economic growth accelerated to the fastest pace in 12 years in the first quarter and the German benchmark DAX share index has gained 6 percent in the past month. Gross domestic product, which accounts for about a third of the 15-nation euro-region economy, unexpectedly rose 1.5 percent from the previous period as companies stepped up spending on machinery and construction.

Morgan Stanley last week raised its 2008 growth forecast for Germany to 1.9 percent from 1.7 percent, citing the stronger-than- forecast performance in the first quarter. The economy expanded 2.5 percent last year.

Bauer AG, the German construction company that laid foundations for the Burj Dubai tower, more than tripled its first- quarter profit as demand from customers around the world grew, the company said on May 15.

“German firms were very successful in the first quarter,'' Franz, who is also one of five economic advisers to the German government, said in a statement. “However, the economic momentum should gradually lose speed because of increasing refinancing costs and a strong euro.''

Business Confidence

Business confidence dropped to the lowest in more than two years in April. The Ifo institute in Munich will probably say tomorrow that its gauge of business optimism fell again in May, another survey of economists shows.

The euro has appreciated almost 16 percent against the dollar in the past year. In that time, crude oil gained 91 percent, breaching $127 a barrel for the first time last week.

Profit at Infineon Technologies AG, Europe's second-largest semiconductor maker, would be cut by 120 million euros if the dollar stays at current levels against the euro in fiscal 2009, Chief Executive Officer Wolfgang Ziebart said last month. Reaching the profit-margin goal “under such circumstances would not be possible.''

Further damping the growth outlook, the U.S. housing slump has driven up the cost of credit and roiled world financial markets. The world's biggest financial companies have posted at least $379 billion in writedowns and credit losses since the start of last year as the subprime mortgage market collapsed.

“The risks of a more severe slowdown have increased as a result of the continuing financial-market crisis and further increases in raw material and oil prices,'' ThyssenKrupp AG, Germany's largest steelmaker, said in a statement last week.

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