Credit Herald

German investor confidence improved more than economists forecast in January after the European Central Bank cut interest rates and the government announced a second spending package to battle the deepening recession.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations rose to minus 31 from minus 45.2 in December, its third successive increase. Economists expected a gain to minus 43.1, according to the median of 37 forecasts in a Bloomberg News survey. The index reached minus 63.9 in July, the lowest since it was first compiled in December 1991.

The ECB last week cut its benchmark lending rate by half a percentage point to 2 percent, the fourth reduction since early October, while Chancellor Angela Merkel’s coalition agreed to spend an extra 50 billion euros ($66 billion) to stem Germany’s worst recession since World War II. European Union Monetary Affairs Commissioner Joaquin Almunia said yesterday that looser monetary and fiscal policies should “create the conditions for a gradual recovery in the second part of 2009.”

“The aggressive easing of monetary policy and the massive economic rescue package from the German government raise hope that the economy will stabilize in the second half of the year,” said Carsten Brzeski, an economist at ING Group in Brussels. Still, “the next weeks are likely to bring more bad news.”

Current Situation

ZEW’s gauge of the current situation slid to minus 77.1, the lowest since December 2003, from minus 64.5. Companies are scaling back output and cutting jobs as the global economic slump curbs demand for products made in Europe’s largest economy.

Volkswagen AG, Daimler AG and Bayerische Motoren Werke AG are among car manufacturers that have suspended production, canceled shifts and shortened working hours in recent weeks. German car sales fell last year to the lowest level since reunification in 1990 payday advance.

Germany’s benchmark DAX share index has lost more than 10 percent this year after dropping 40 percent in 2008. Business confidence dropped to the lowest in more than a quarter of a century in December and unemployment rose for the first time in almost three years.

German Economy Minister Michael Glos said today he expects the economy to shrink as much as 2.5 percent this year. “I don’t know if the economy will recover in the second half,” he said.

Fiscal Stimulus

Finance Minister Peer Steinbrueck said in Brussels today that he and his European colleagues “worry about the financial sector because confidence has not yet been revived.”

Europe’s banks have lost 60 percent of their market value in the last six months, based on the Bloomberg Europe Banks and Financial Services Index. Commerzbank AG of Germany, Ireland’s Allied Irish Banks Plc and Austria’s Raiffeisen Zentralbank Oesterreich AG have all fallen more than 80 percent.

Since November, the German government has agreed to fiscal rescue packages worth 80.3 billion euros over two years, which at about 1.6 percent of gross domestic product is the biggest stimulus program in Europe.

In addition, the ECB has cut its key rate by 2.25 percentage points in the past four months, the most aggressive easing since the bank took control of monetary policy a decade ago.

The German economy will expand 0.7 percent in 2010 after shrinking 2.3 percent this year, the European Commission said yesterday. The euro region, which takes over 40 percent of German exports, will grow 0.4 percent next year after contracting 1.9 percent in 2009, the commission forecast.

ECB President Jean-Claude Trichet said last week he sees “2010 as the year of recovery.”

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