Money world

German investor confidence unexpectedly rose to the highest level in almost two years in March after the European Central Bank reduced borrowing costs to a record low.

The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations increased to minus 3.5 from minus 5.8 in February. That’s the highest reading since July 2007. Economists expected a drop to minus 8, according to the median of 39 forecasts in a Bloomberg News survey.

The ECB on March 5 lowered its key rate by 50 basis points to 1.5 percent to stem the worst economic slump in 60 years. In Germany, Chancellor Angela Merkel’s coalition has agreed to spend about 80 billion euros ($104 billion) to stimulate economic growth. Germany’s benchmark DAX share index has gained 8 percent this month, paring its decline this year to 17 percent. The euro rose almost half a cent to $1.3021 on ZEW’s report.

“Expectations are getting ahead of themselves,” said Kenneth Broux, an economist at Lloyds Banking Group Plc in London. “Investors are looking at equity markets to provide a slightly more confident outlook, but in the economy there’s no sign that we’re near the bottom.”

ZEW’s gauge of current conditions fell to minus 89.4 from minus 86.2 in February. That’s the lowest since September 2003.

Deeper Recession

There are signs Germany’s recession is deepening. Industrial output dropped 7.5 percent in January from December, the biggest decline since data for a reunified Germany began in 1991, and factory orders plunged 38 percent from a year earlier as export demand slumped. Unemployment rose in February for a fourth straight month, pushing the jobless rate to 7.9 percent, while business confidence dropped to a 26-year low.

German gross domestic product may drop 3.7 percent this year instead of the 2.7 percent projected in December, the Kiel-based IfW institute said on March 12. The ECB expects the economy of the 16 euro nations to shrink about 2.7 percent this year and to stagnate in 2010 freecreditreport.

Volkswagen AG, Europe’s largest carmaker, on March 12 predicted a first-quarter loss and lower profit and revenue this year. Chief Executive Officer Martin Winterkorn said it will be “one of the most difficult years” in the company’s history.

BASF SE, the world’s largest chemical company based in Ludwigshafen, said last month it will accelerate plant closures and eliminate at least 1,500 jobs.

No Pickup Yet

“Demand for chemical products has not picked up since the start of 2009,” BASF CEO Juergen Hambrecht said. “A reversal of the trend is not yet in sight.”

“Things will get worse before they get better,” said Carsten Brzeski, an economist at ING Group in Brussels. Still, “the pace of contraction should slow down significantly in the summer months, when most measures of the fiscal package and the aggressive monetary easing find their way into the economy.”

Merkel’s government has crafted two economic packages since late last year, including a 100 billion-euro fund to boost company liquidity and 82 billion euros in stimulus measures, such as investment in infrastructure and an incentive to scrap old cars to buy new, energy-efficient vehicles.

The ECB has cut its key rate by 2.75 percentage points since early October, the most aggressive easing since the bank took control of monetary policy a decade ago. ECB President Jean- Claude Trichet indicated earlier this month that policy makers may lower borrowing costs further.

A drop in energy costs is also boosting purchasing power and may bolster company and consumer spending.

“The bottom of the recession is likely to be reached this summer,” ZEW President Wolfgang Franz said in a statement today. “The economic situation is extremely bad, but we see the first rays of light.”

Source