Eurozone deal boosts investor confidence

The closely watched ZEW economic expectations index -- which has fallen for nine months in a row and reached its lowest level in three years last month -- showed a surprise rise of 1.4 points in December to stand at minus 53.8 points, the ZEW think tank said in a statement.

Analysts had been pencilling in a further decline after the index fell to minus 55.2 points in November, its lowest level since October 2008.

"The downward trend has come to a halt. Economic expectations seem to have bottomed out," said ZEW chief Wolfgang Franz. "Financial analysts are clearly still expecting low growth, but not a crash of the German economy in the next six months."

"The decisions taken at the latest EU summit will have had a positive effect on sentiment. Pending the finalisation of the actual details, those decisions mark an important step towards creating a functioning framework for monetary union," Franz said.

Nevertheless, at its current level, the ZEW barometer was still way below its historical average of 24.6 points and while the sub-index measuring analysts' assessment of the current economic situation remained in positive territory, it fell for the fifth month in a row, the think-tank noted.

Nervousness arising from the eurozone debt crisis has weighed on investor confidence for several months now "and with the index still in negative territory in December, that points to an economic slowdown in the coming half-year," ZEW said.

Nevertheless, a raft of recent economic data showed that the German economy, Europe's biggest, is holding up fairly well to the sovereign debt crisis so far even if growth is widely expected to slow noticeably next year.

At a make-or-break summit last week, EU leaders banded together to back tighter budget policing in a desperate bid to save the eurozone.

After years of foot-dragging on deepening integration, 26 of the 27 EU states signalled their willingness to join a "new fiscal compact" to resolve the debt crisis threatening to crack apart the monetary union. Initially, financial markets showed relief at the outcome.

But European shares fell again on Monday as the international credit rating agency Moody's said Europe had failed to deliver "decisive policy measures" to fix the eurozone debt crisis and it would put all EU sovereign debt ratings under review as a result.

Analysts were therefore wary about reading too much into the latest ZEW data and said Germany may still be headed for recession.

"The slight improvement in confidence may prove temporary," said Berenberg Bank senior economist Christian Schulz. "Even though the summit did deliver the expected results, additional action from the European Central Bank remains elusive.

"More and more investors fear that the German economy may already be grinding to a halt as an effect of the confidence crisis. As the euro crisis continues, Germany is likely to fall into recession with the rest of the currency zone this winter," Schulz said.

Jennifer McKeown, senior European economist at Capital Economics, agreed.

"Despite rising slightly in December, the German ZEW index points to a risk of recession in the coming months," she said. "The increase did not reverse last month's fall and the current level means that a large majority of investors still expect conditions to deteriorate in future."

The ZEW is not always viewed as a particularly reliable predictor of the future direction of the economy and "more reliable business surveys paint a less gloomy picture," McKeown noted.

"But even they suggest that the recovery has ground to a halt," she said, predicting a contraction in the economy next year "as the debt crisis intensifies and the eurozone starts to break up."

Barclays Capital Research economist Thomas Harjes was not so pessimistic.

"The latest ZEW figures add further evidence to our view that, following a soft patch and some negative growth in the fourth quarter, German GDP (gross domestic product) will record modest, positive growth again in early 2012," he said.

AFP/mry