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German investor confidence down due to strong euro and world economic outlook

The global economic outlook and strong euro led to the lowest investor confidence in nearly 15 years.

The ZEW institute's index, which measures investors' expectations for Europe's biggest economy over the next six months, dropped to minus 37.2 points for December from minus 32.5 last month.

That was the worst showing since January 1993, when the index stood at minus 49.7, and also came in below the minus 34 forecast of economists surveyed by Dow Jones Newswires.

"The financial market experts see clear risks for economic growth in important industrial countries, particularly in the United States," ZEW said in a statement. "This impairs the export prospects of the German economy. The strong euro has furthermore increased uncertainty for German exporters."

The U.S. subprime lending crisis and ensuing market volatility has fueled worries over the health of the American economy - as well as expectations that the Federal Reserve will continue cutting interest rates.

Those expectations have pushed the euro to all-time highs of nearly US$1.50 - a development that threatens to make European exports less competitive abroad. Strong exports have been a key element of Germany's economic upswing over the past two years.

ZEW said investors expect private consumption to remain "more or less stable" over the next six months, but do not expect consumer spending to pick up.

The institute also cited signs of backtracking on economic reform at home as a problem.

Chancellor Angela Merkel's governing coalition has agreed to introduce more generous jobless benefits for older unemployed people, softening an unpopular reform introduced by her predecessor, Gerhard Schroeder.

"The dilution of domestic reforms and the uncertainty on the financial, currency and commodity markets have left their marks," ZEW president Wolfgang Franz said.

ZEW said that investors' darkening outlook was accompanied by a more pessimistic view of the current economic situation in Germany. A subindex covering the current situation fell to 63.5 points for December from 70 last month.

In a separate report, the International Monetary Fund slightly cut its 2008 growth forecast for the German economy to 1.9 percent, while it raised the outlook for this year to 2.5 percent.

It said that growth next year would moderate along with a slowing U.S. economy, and that it "will also be dampened, though to a more modest extent, by the stronger euro and higher oil prices."

In October, the IMF forecast growth of 2 percent next year and 2.4 percent in 2007.

Alexander Koch, an economist at UniCredit in Munich, said that the poor ZEW reading "signals a strong deterioration in the growth dynamic."

Still, he also pointed to the survey's volatility, arguing that "the ZEW appears to continuously underestimate the resilience of the German economy."

While other indicators also have been sliding recently, the Ifo institute's index of business confidence unexpectedly rose last month for the first time since April.

"After an expected growth dip at the turn of the year, especially the solid prospects for the industrial sector argue for a continuation of the economic upswing also in 2008," Koch wrote in a research note.

Government figures released Monday showed German exports continuing to grow. Germany exported goods worth EUR88.9 billion (US$130.5 billion) in October - a 6.3 percent increase from a year earlier.

Still, that was a slower pace than the double-digit increases seen earlier this year. From January to October, exports were up 10 percent.

The monthly survey by the Mannheim-based ZEW, or Center for European Economic Research, was based on a poll of 284 analysts and institutional investors.

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