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German investor confidence up on `QE effect`

Investment sentiment in Germany hit an 11-month high this month on hopes the European Central Bank is about to roll out its heavy anti-deflation artillery, analysts said on Tuesday.

Berlin: Investment sentiment in Germany hit an 11-month high this month on hopes the European Central Bank is about to roll out its heavy anti-deflation artillery, analysts said on Tuesday.

The widely watched investor confidence index calculated by the ZEW economic institute jumped 13.5 points to 48.4 points in January, its highest level in 11 months, ZEW said in a statement.

It was the third consecutive monthly rise and beat analyst expectations for a more modest increase to around 40.0 points.

"The new year started with turmoil in the capital markets. News of the upcoming parliamentary elections in Greece and the Swiss National Bank`s decision to abandon the euro cap on the franc`s value have led to strong stock market fluctuations," said ZEW president Clemens Fuest.

"However, this seems not to have impressed ZEW`s financial market experts with regard to their expectations for the German economy. Instead, decreasing crude oil prices and a depreciating euro have contributed to a further gain of the indicator," Fuest explained.

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 jumped by 12.4 points to 22.4 points in January. While the ZEW is frequently criticised for being volatile and not particularly reliable, analysts nevertheless took heart from this month`s better-than-expected reading. 

"The third increase in a row is a good piece of good news and adds to signs that the German economy is about to leave the recent lull behind," said Natixis economist Johannes Gareis.

"Indeed, with the recent sharp decline in oil prices and the lower euro exchange rate, a significant stimulus is in the pipeline. Obviously, Germany`s investors and analysts have also scaled up the expectations for the ECB`s looming QE programme," he said.

The ECB is scheduled to hold its first policy meeting of the year on Thursday and market speculation is at fever pitch that its president Mario Draghi will announce a programme of sovereign bond purchases, known as quantitative easing or QE, to jump start the eurozone`s morose economy.

QE is regarded as the central bank`s most powerful tool yet to ward off the threat of deflation in the single currency area, where consumer prices actually started to fall in December.BayernLB economist Christiane von Berg similarly attributed the strong ZEW reading to the "QE effect".

The large-scale purchase of government bonds would help drive the euro down lower against major currencies "and that will provide a boost for exports," she said.

"Today`s ZEW data confirm the positive upturn which has emerged in Germany over the past couple of months. All the signs are for more dynamic growth in 2015," von Berg said.

BNP Paribas economist Evelyn Hermann said expectations of the asset purchase programme "certainly explains part of the ZEW increase."

The euro`s drop against the Swiss franc would also help.

"In this context, we expect other January surveys for Germany are likely to show sizeable improvements, too, in line with our expectations of gradually strengthening quarterly growth rates in 2015," the analyst said.

Capital Economics economist Jennifer McKeown said that "presumably any worries about the effect of the Greek crisis on the German economy were offset by expectations of ECB quantitative easing and hopes of a boost to exports from the weakening euro."

"But note that the ZEW survey has not been a particularly reliable indicator of actual activity in the past and if the Greek situation deteriorates in the aftermath of this week`s election or ECB QE disappoints, investors may well take a dimmer view of Germany`s prospects," she cautioned.