A closely watched survey showed Tuesday that German investor confidence suffered a larger-than-expected drop this month, pushed down by worries over the U.S. subprime mortgage crisis.
The ZEW institute's monthly index, which measures investors' economic expectations for the next six months, dropped to minus 6.9 points in August from 10.4 in July.
Economists surveyed by Dow Jones Newswires had predicted a reading of minus 3 points.
ZEW said that the experts it surveyed saw potential risks from the crisis over subprime mortgages - centering on defaults on loans made to people with shaky creditworthiness - for the U.S. economy as a whole, and by extension for the German economy, Europe's biggest.
"Their assessment regarding the current profit situation of German companies dropped significantly, in particular, for firms in the banking and insurance sector," it said. A sub-index measuring investors' evaluation of the current economic situation declined by 8 points to 80.2.
ZEW said that German exports - long the chief motor of the German economy - might be hampered by lower purchasing power of U.S. consumers, but argued that falling stock prices would have only a limited impact on consumer confidence in Germany itself.
"The crisis is first and foremost a problem of the United States," the institute's president, Wolfgang Franz, said in a statement. "Potential consequences on the German economy will be limited according to our current knowledge. Possible credit crunches come together with very good balance sheets of German companies."
The Mannheim-based ZEW, or Center for European Economic Research, polled 291 analysts and institutional investors for the monthly survey.
This month's overall decline was the third consecutive drop in the ZEW index, and put it at its lowest level since last December's reading of minus 19.
Still, another key indicator for the German economy, the less volatile Ifo index of business confidence, has remained near record highs over recent months.
"By looking at past experience, one is tempted to say that (the ZEW decline) could have been even worse," economist Andreas Rees at UniCredit in Munich said in a research note.
He cautioned against reading too much into strong drops or rises, arguing that "this is more a matter of psychology than fundamental facts."
"A meltdown for the German economy is not on the cards," Rees said. He added, however, that "the best is probably behind us" and the forthcoming quarters likely will see "solid" economic growth rather than the "exceptionally strong economic activity" of last year.
Last week, government data showed that German growth cooled slightly in the second quarter, with gross domestic product expanding by 0.3 percent quarter on quarter as construction investment slowed.
That was the weakest showing since the last quarter of 2005 and came in slightly below economists' expectations.
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