Confidence In German Economy At Seven-Year Low

Higher taxes, interest rates lead to fears of slowing growth in Europe's largest econony.

FRANKFURT, Germany (AP) - German investor confidence slid to its lowest level in more than seven years amid fears that tax increases and rising interest rates could slow growth in Europe's largest economy, a leading institute said Tuesday.

The closely watched ZEW institute's index dropped for the eighth straight month, also because of concern that German exports will fall because of a slowing economy in the United States.

The index, which measures expectations for the next six months, fell to minus 22.2 points in September from minus 5.6 points in August. The result was the lowest level since January 1999 and far below its historical average of 34.7 points.

It was also below the minus 9 points expected by analysts polled by Dow Jones Newswires.

''The gap between expectations and the current situation again indicates that the positive business climate is at risk,'' ZEW President Wolfgang Franz said. ''The German government should not ignore these alarm signals and redress the serious imbalances in its economic policy.''

Economists expect government plans to increase VAT from 16 percent to 19 percent in January will halt a revival in consumer spending in Germany.

The cost of investments has also risen. The European Central Bank has raised its key interest rate four times since December 2005 to 3 percent and is likely to raise it again next month.

The Mannheim-based Center for European Economic Research, or ZEW, interviewed 307 analysts and institutional investors for its monthly survey.

Andreas Rees, an economist with HVB in Munich, said that since May, the ZEW growth expectations declined about 18 points each month on average.

''Especially, the latest fall is puzzling, given that major macro fundamentals did not argue for a renewed drop,'' Rees said. ''Ranking second in the ZEW puzzle is the impending VAT hike. Although this will definitely lead to a shrinking GDP level in the first quarter of 2007, a lot of pessimism had already been priced in before. What do survey participants know about the VAT increase they did not know already one month ago?''

UBS analyst Edward Teather said that while the expectations index sank further, ''emphasizing the breadth of consensus opinion expecting a slowdown in growth over the next six months, current conditions were still seen as robust.''

He noted that the ZEW's current conditions survey index rose to 38.9 from 33.6, compared with the increase to 35.0 that had been expected.

Another leading economic institute said the country was in the midst of a strong upswing fueled by strong domestic demand and raised its forecasts.

The Essen-based RWI forecast growth of 2.2 percent for this year and 1.7 percent for 2007. It previously forecast 1.8 percent growth in 2006 and 1.3 percent growth in 2007.

''The German economy is currently in a strong upswing. Domestic demand is the driving force, particularly investment in plant and machinery goods,'' RWI said in its report.

''We expect the upswing to continue in the forecast period, although it will lose some momentum. Growth will continue to be driven by domestic demand, while foreign trade will barely boost growth amid a slowing of the world economy.''

The German government reported earlier Tuesday that producer prices, which measure price pressures at the factory gate, rose 0.2 percent in August from July, and were up 5.9 percent on the year.

More in Supply Chain