German investor confidence deteriorated sharply in April, hurt by weakness in the manufacturing sector and oil price rises, suggesting a recovery in Europe's biggest economy remains fragile. The surprise fall in the Mannheim-based ZEW institute's expectations indicator heightened speculation of a fresh round of interest rate cuts by the European Central Bank in response to continuing weakness in the euro zone economy. Economists said the fourth straight drop in the ZEW data to its lowest since last July, points to a further decline in Germany's key Ifo institute business confidence index, due for release next Monday. "A third consecutive monthly (Ifo) decline could signal the start of a new downtrend," said Lehman Brothers economist Phyllis Papadavid.
The ZEW's gauge of optimism among financial analysts and institutional investors dropped almost eight points in April to 49.7 from 57.6 in March. The consensus forecast of 23 economists polled by on Friday was for the index to edge up to 58.0. The institute said disappointing data on German industrial production and orders, as well as the weak labour market and the rising oil price, had hurt confidence in April and outweighed the impact of positive jobs data from the U.S. "Optimism among financial analysts is giving way to the reality that a further economic recovery this year is not guaranteed," said ZEW President Wolfgang Franz. Andreas Rees, an economist at HVB Group in Munich, said April's drop in the expectations indicator had exceeded his worst expectations. "It shows there won't be a strong recovery in the second half either," he said, adding that HVB had cut its 2004 growth forecast for Germany to 0.9 percent, from 1.2 percent. The government forecasts growth of between 1.5 percent and two percent.
BONDS UP, EURO DOWN
The June Bund future rose after the ZEW report, trimming earlier falls, while the euro slid against the dollar and yen amid speculation the European Central Bank will trim borrowing costs to spur growth. "The ZEW was very bad and points to another round of weak euro zone data, which raises the focus on a potential euro zone rate cut," said Steven Pearson, chief currency strategist at HBOS Treasury Services. ECB policymakers on Monday reiterated their view that European growth is on track for a "gradual and modest recovery" and gave no indication they may reduce interest rates. Bernd Weidensteiner, an economist at DZ Bank in Frankfurt, said the latest ZEW survey results were "no reason to start panicking" about the economy. "The preconditions for moderate growth are still there," he said. "People stopped hoping for stronger growth quite a while ago." The ZEW said it polled 306 analysts and investors between March 29 and April 19. Its current situation indicator rose less than expected in April, edging up to minus 72.5, from minus 72.7 in March. Economists had expected minus 70.5.///www..com