German investor confidence unexpectedly rose to a two-year high in April, suggesting Europe’s largest economy can weather the resurgent debt crisis in the euro region’s periphery.
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, increased to 23.4 from 22.3 in March. That’s the fifth straight gain and the highest reading since June 2010. Economists forecast a drop to 19, according to the median of 39 estimates in a Bloomberg News survey.
Germany may avoid a recession as unemployment at a two- decade low bolsters domestic spending, helping to offset waning demand for its exports across the euro region as austerity measures bite. At the same time, rising borrowing costs in Spain have fueled concern that the debt crisis is not under control. While Germany’s benchmark DAX share index is up 13 percent this year, it has shed 7 percent in the past month.
“Today’s ZEW index is good news but it should be taken with a pinch of salt,” said Carsten Brzeski, senior economist at ING Group in Brussels. “Yes, the economy avoided falling off the cliff, but it is still flirting with recession.”
The euro jumped about a quarter of a cent after the report before retracing to trade at $1.3138 at 1 p.m. in Frankfurt. European stocks gained for a second day, with the Stoxx Europe 600 Index adding 1 percent.
While today’s ZEW report adds to signs that the German economy will rebound from its 0.2 percent contraction in the fourth quarter of 2011, spending cuts across the euro region are curbing foreign sales and clouding growth prospects just as higher oil prices threaten to drive up inflation and erode household purchasing power.
The inflation rate in the 17-nation euro region held at 2.7 percent for a fourth month in March, the European Union’s statistics office said today, revising an initial estimate of a decline to 2.6 percent. U.K. inflation unexpectedly accelerated to 3.5 percent, according to data published by the Office for National Statistics in London.
In Asia, the Indian central bank cut its benchmark interest rate by a greater-than-forecast half a percentage point, seeking to bolster growth with the first reduction since 2009. The easing contrasts with Asian neighbors including Thailand and Indonesia that have halted rate cuts as inflationary pressures increase.
In the U.S., industrial production may have risen 0.3 percent in March from the previous month, according to the median forecast in a Bloomberg News survey ahead of a report today.
Rising investor confidence in Germany is a “positive surprise, especially because returning financial market tensions, high oil prices and weak stock markets usually weigh on sentiment,” said Alexander Koch, an economist at UniCredit Group in Munich. “It’s an indication that the German economy is doing quite well and chances are good that we can avoid recession.”
ZEW’s gauge of the current situation rose to 40.7 from 37.6 last month. Economists predicted a drop to 35.
The euro-area economy will shrink 0.3 percent this year, driven by contractions of 1.3 percent in Italy and 1 percent in Spain, the European Commission said Feb. 23. It forecast growth of 0.6 percent in Germany.
‘Tense and Difficult’
Economic conditions in Europe will “remain tense and difficult over the next few years,” Henkel AG (HEN3) Chief Executive Officer Kasper Rorsted said yesterday. To combat that, the German cosmetics and adhesives maker is seeking to boost the proportion of sales in emerging markets to 45 percent of revenue this year from 42 percent in 2011.
“We are convinced that the euro in its function as a common currency is better for our economy in Germany and better for our company,” Rorsted told the annual shareholders meeting in Dusseldorf.
The debt crisis has nevertheless fueled speculation that the currency bloc could splinter as the gaps between Germany and its euro-area neighbors widen.
In Spain, where unemployment is approaching 24 percent as the economy contracts, the government is implementing the deepest austerity measures in three decades in an attempt to rein in its budget deficit and win back investor trust.
Spanish 10-year yields breached 6 percent yesterday and the cost of insuring the country’s bonds against default advanced to a record.
Spain sold 3.18 billion euros ($4.18 billion) of bills today, exceeding the maximum target of 3 billion euros. Still, the average 12-month yield was 2.623 percent, up from 1.418 percent at the last auction on March 20, the Bank of Spain said. The Treasury also sold 18-month bills at 3.11 percent, compared with 1.71 percent last month. The country will sell 10-year bonds on April 19.
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