Evidence grew on Tuesday that Germany is headed for a period of weaker growth after a flying start to the year saw Europe's largest economy beat forecasts by a country mile.
The ZEW institute said its closely watched indicator of economic sentiment fell by 0.7 points and now stands at minus 41.4 points after minus 40.7 points in April. Economists had expected an improvement to minus 38.0 points.
"On the one hand, economic expectations for the next six months for the United States and consequently also for the German export industry have increased considerably. On the other hand, inflationary risks remain high. This should negatively affect private consumption in Germany," the ZEW said.
"German firms were very successful in the first quarter of 2008. However, the economic momentum should gradually lose speed because of increasing refinancing costs and a strong euro. This should have a negative impact on firms," ZEW president Wolfgang Franz said in a statement.
A separate ZEW indicator showing how the 300 analysts and institutional investors polled each month assess the current economic situation in Germany rose 5.4 points to 38.6 points.
Data since the beginning of the year have suggested that the German economy was holding up surprisingly well despite the strength of the euro, rising energy and food prices, the credit crunch and a slowing of the US economy.
The economy grew 1.5 percent in the first three months of the year, data last week showed last week for example, well ahead of market expectations of just 0.7 percent, with industrial output rising 2.3 percent.
This helped the euro zone as a whole to grow 0.7 percent despite the French economy expanding just 0.6 percent and a housing slump in Spain that reduced Madrid's contribution to 0.3 percent.
But while Germany's reform efforts undoubtedly contributed to the economic performance the rise was also in part down to statistical effects and economists agree that Germany cannot escape the global headwinds for much longer.
As "payback" German growth may even decline in the second quarter, dragging down eurozone growth to just 0.1 percent before settling to 0.2 percent for the remainder of the year, Bank of America economist Holger Schmieding said.
"Germany is heading for tough times ... The weak ZEW readings do not contradict our baseline scenario," he said.
Jennifer McKeown at Capital Economics agreed, saying the fall in the ZEW index was a "disappointment" that suggested concerns over the potential impact of the credit crunch and strong euro on the wider economy were mounting.
Indeed last month's reading of the Ifo index showed a steeper-than-expected decline and hard data in the form of industrial output and exports showed declines in April as the strong euro made German goods less competitive.
And with inflation running at 2.4 percent in April -- petrol cost 8.8 percent more than a year earlier and food and soft drinks were 7.1 percent dearer -- German consumers will be hard pressed to ride to the rescue.
Further clues on how businesses view the economy will be given in the release of the May reading of the Ifo business climate index on Wednesday.
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