The recent upturn in the German and euro zone economies may have been a false dawn, according to new data released yesterday.
In its survey of the euro zone's largest economy, the Mannheim-based ZEW economic research institute said yesterday that its economic expectations indicator fell to a negative reading of 5.6 in August, down sharply from 15.1 in July. Analysts said the latest trend would ease fears of higher interest rates.
ZEW president Wolfgang Franz warned of "dark clouds" on the horizon in 2007 when Germany's coalition government is expected to raise value added tax. The decline in economic expectations came in spite of an increase in ZEW's indicator for current conditions, and reflect fears that next year's tax rises will choke the country's nascent recovery. Concerns were strengthened by the construction sector recording its weakest growth rate in orders so far in 2006, according to figures released by the German federal statistics office yesterday.
Data for euro-zone industrial orders came in below expectations in June, raising questions about whether growth in the area has peaked. New orders fell 2.5 per cent in June, EU statistics agency Eurostat said yesterday.
The news added to fears that the recent resurgence in the German economy was a short-lived response to temporary factors, such as the formation of a new government and an economic boost from Germany's hosting of the World Cup.
"It raises questions about where the German business boom has gone," David Brown chief European economist at Bear Stearns International said yesterday. "The ECB can't just go ahead and be so belligerent on rate hiking and ignore what's happening in the German economy."
Expectations for lower interest rates caused the price of German government bonds to rise. The euro fell against the dollar to $1.265 on the news, down from $1.2875. - (Additional reporting, Reuters)
