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Eurozone decline dents German economy

(MoneyWatch) Although Germany has so far escaped the worst of Europe's financial crisis, the region's biggest economy is starting to share its neighbors' fiscal pain.

German investor confidence fell for the third straight month, according to a study released Tuesday by the ZEW research center, with the index falling in July to minus 19.6 points, from minus 16.9 the previous month. That downturn took financial markets by surprise, with most analysts having expected an uptick in sentiment.

That dip in confidence also follows other worrying developments in Germany:

  • The closely watched Ifo index of business confidence fell slightly more than expected in June, driving it its lowest level since March 2010. Attitudes in the key manufacturing sector were particularly glum, as rising uncertainty led to increasingly pessimistic expectations.
  • German business activity shrank in June at its fastest rate in three years, according to data services firm Markit.
  • Construction industry activity has fallen for three consecutive months, although the rate of decrease slowed slightly last month.
  • Germany's manufacturing sector shrank in June at its fastest rate in three years.
  • The number of unemployed people in Germany edged up last month, rising to 2.882 million, from 2.875 million in May.

These trouble spots are appearing even as the European debt crisis has in some ways played to Germany's advantage. For instance, the decreasing value of the euro means Germany's goods are cheaper to export. Because of increased efficiency, German manufacturers' unit-labor costs also have risen more slowly than those of its neighbors.

A report by London's Berenberg Bank estimates that about 60 percent of German exports are shipped outside the euro area. That compares with about 50 percent for France and 42 percent for Spain, based on 2010 data. A Citigroup (C) study earlier this year found that since the euro began in 1999, German real exports have increased 120 percent. France and Italy have seen their exports grow only 40 percent and Greece's just 30 percent.

As the eurozone's main economic engine, Germany has an outsized impact on the currency union and its efforts to dig out of the sovereign debt crisis. It has enjoyed economic growth and low unemployment even as financially troubled countries such as Spain and Italy have sunk into recession. German growth of 0.5 percent in the first quarter kept the eurozone as a whole from sliding into recession, and the German economy is still expected to post modest growth this year.

The Associated Press contributed to this report.

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