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German recovery runs out of steam as sentiment falters

Europe's biggest economy German could already be running out of steam, data showed on Tuesday, and economists say the country's World Cup win is unlikely to provide any fresh momentum.

FRANKFURT: Europe's biggest economy German could already be running out of steam, data showed on Tuesday, and economists say the country's World Cup win is unlikely to provide any fresh momentum.

While hundreds of thousands of jubilant fans massed at Berlin's Brandenburg Gate in a massive party Tuesday for the national heroes bringing home football's top prize, clouds appeared to be gathering over Europe's economic powerhouse.

Since Germany is the main engine of growth driving the still tentative economic recovery in the wider eurozone, that could be bad news for the region as a whole, analysts said.

Adding to a growing list of disappointing data recently, the widely watched ZEW investor confidence index fell to its lowest level in 19 months. The index dropped by a bigger-than-expected 2.7 points to 27.1 points in July, ZEW said in a statement.

Financial markets were disappointed, with stock markets sliding and the euro dipping against the dollar.

"Germany has experienced a slight dent in economic activity recently -- retail sales declined and industrial production as well as incoming orders dropped," said ZEW president Clemens Fuest.

The latest decline in the ZEW barometer "reflects this sobering development," Fuest said. But he insisted that "on a general note, however, the medium-term economic outlook remains favourable".

For the survey, ZEW questions analysts and institutional investors about their current assessment of the economic situation in Germany, as well as their expectations for the coming months. The sub-index measuring financial market players' view of the current economic situation in Germany fell by 5.9 points to 61.8 points in July, its first decline since November 2013.

NO WORLD CUP FACTOR

"While the World Cup trophy just landed in Berlin, the ZEW index is sounding a signal of increased caution," said ING DiBa analyst Carsten Brzeski. The expert said that recent data had raised concerns of a possible stagnation in the German economy in the second quarter.

"Weak industrial production, a sharp correction in the construction sector and the reversal of the positive weather effect from the first quarter do not bode well for second-quarter growth," he said. "Only die-hard optimists and soccer fanatics would argue that the German victory at the soccer World Cup would be sufficient to boost private consumption," the analyst added.

Contrary to 2006 when Germany hosted the World Cup, "soccer enthusiasm is very unlikely to ignite economic confidence," Brzeski argued.

Germany beat Argentina 1-0 in a nail-biting final on Sunday and some observers have suggested the feel-good factor could boost domestic consumption, as the championships had done eight years ago. "Back in 2006, both the national soccer team and the economy had been written off and successes came as huge positive surprise. Combined with a very special atmosphere, a new national self-confidence and, most importantly, earlier implemented reforms, the summer of 2006 brought confidence back," Brzeski said.

"This time around, however, the magical interaction between soccer and the economy should be very limited," he added.

The German economy was in fundamentally much better shape and the latest data suggested the pace of recovery may have already peaked, said Capital Economics economist Jennifer McKeown. The latest ZEW reading "adds to signs of a slowdown in the eurozone's largest and strongest economy," she said.

Berenberg Bank economist Christian Schulz agreed that while the ZEW index remains "significantly positive, such a protracted period of declines points to a noticeable cooling of the economy".

Postbank economist Heinrich Bayer attributed the renewed drop in the index to disappointing hard economic data and increased geo-political risks. "But a continuation of the recovery in the euro area is a whole is not in jeopardy," he said.

Natixis economist Johannes Gareis said that with the ZEW index "now only slightly above its long-run average, (this) indicates that the German economy is not likely to gather further steam this year".

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