German analyst and investor sentiment surprised by falling for the first time in three months in October, hitting its lowest level since July and suggesting Europe's largest economy would recover only gradually.
The Mannheim-based ZEW economic think tank said on Tuesday its monthly poll of economic sentiment fell to 56.0 from 57.7 in September, pushing the euro lower against the dollar and the pound, and sending Bund futures to a session high.
A reading of 58.3 had been forecast in a Reuters poll.
For a graphic showing the ZEW economic sentiment indicator and German GDP, click here: http://graphics.thomsonreuters.com/109/DE_ZEWGDP1009.gif
Hopes have been rising about the outlook for the German economy in recent months, fuelled by a rise in industrial orders and a pick-up in foreign demand. However, much of this has been put down to government stimulus measures and senior policymakers have said the recovery is not yet self-supporting.
The ZEW said a fall in exports in August — the last month for which data is available — had probably dampened sentiment, noting that there was ongoing uncertainty about how private consumption would develop in coming months.
"The assessment of the financial market experts reflects the prevalent opinion. The economy will improve only gradually," ZEW President Wolfgang Franz said in a statement.
Leading authorities have begun to revise up their economic forecasts for Germany, with sources in the government saying Chancellor Angela Merkel's administration is now expecting a contraction of some 4.5 to 5.0 percent this year.
The government had previously forecast the economy would shrink by some six percent this year.
In the postwar era, Germany has never suffered a contraction of more than one percent in a calendar year, but a slump in global demand has severely dented the export-dependent economy, with manufacturers hit particularly hard.
However, fuelled by government stimulus programmes, business sentiment has recovered somewhat, and manufacturing orders have risen for six straight months as firms rebuild stocks.
A separate ZEW gauge of current conditions rose to -72.2 from -74.0, still short of a consensus forecast for -69.0.
Carsten Brzeski, an economist at ING Financial Markets, said the German economy was about to enter calmer waters after probably picking up speed in the July-September period.
"It could still outperform most if not all of its fellow euro zone countries next year," he said.
