08/14/2012 03:04 EDT | Updated 10/13/2012 05:12 EDT

German GDP grows more than expected in Q2 but survey shows investors worried about future

BERLIN - Germany's economy grew slightly more than anticipated in the second quarter but a closely watched measure of investor confidence dropped unexpectedly, indicating fears are growing that the European Union financial crisis will become an increasing drag on the bloc's largest economy.

The Federal Statistical Office reported the German economy grew 0.3 per cent in the second quarter, beating expectations of a 0.2 per cent increase though slowing from the first quarter's 0.5 per cent growth.

A clearer breakdown of the quarterly performance will not emerge until later this month. However, the statistics office said exports and public consumption combined with lower unemployment to lift growth. One downbeat indicator was a fall in investment in machinery and equipment, a possible sign that firms are getting less confident about the future.

"The economy remains the stronghold of the eurozone —however, another strong quarter merely glosses over the fact that even the stronghold has already caught the euro crisis virus," said Carsten Brzeski, an economist with ING bank in Brussels.

That pessimism came through in the ZEW institute's forward-looking report on investor confidence, which showed a drop in economic sentiment to minus 25.5 points in August from minus 19.6 points the month before. Economists had been expecting a slight improvement.

"The indicator's decline in August signals that financial market experts still expect the German economy to cool down throughout the next six months," ZEW said in its report. "Especially export-oriented sectors may be affected."

The decline took the ZEW indicator to its lowest level in 2012, though it remains well above its lows hit of below minus 60 points that it hit during the financial crisis in 2008.

The survey, which polled 262 institutional investors and analysts, also found that the assessment of the current situation in Germany fell 2.9 points in August to 18.2 points overall.

The German economy has so far managed to withstand the effects emanating from the debt crisis on its doorstep but many economists are worried it will soon be dragged down as well. With many euro countries in recession, demand for Germany's high-value exports may start to falter.

"Please keep in mind that about 40 per cent of all German exports are shipped to eurozone countries," UniCredit economist Andreas Rees cautioned after the German GDP growth figures were released.

The 17-country eurozone a whole contracted 0.2 per cent in the second quarter.

However, the better-than-expected German figures coupled with news that France's economy did not contract during the quarter as had been widely feared, may help the eurozone avoid shrinking during the quarter. A number of euro countries, including Greece, Spain and Italy are already in recession — officially defined as two consecutive quarters of shrinking output.

The German government is predicting overall growth of 0.7 per cent this year, though others, like the International Monetary Fund and Germany's central bank, are forecasting slightly more robust gains.