German ZEW investor morale falls more than expected as energy prices weigh

By Linda Pasquini

Oct 20 (Reuters) - German investor morale fell more than expected in October, the ZEW economic institute said on Tuesday, ending a five-month run of improvements, as high energy prices weigh on private consumption and investment.

The index fell to 28.1 points. Analysts polled by Reuters had expected the reading to slip to 30 from 34.7 points a month earlier.

"Private consumption and investment remain weak because of high energy prices: they put real incomes under pressure, increase production costs and keep inflation higher for longer," said ZEW President Achim Wambach.

German producer prices rose at their fastest pace in three and a half years in September, the federal statistics office said earlier on Tuesday, driven by higher energy prices due to the Iran war.

Higher oil and natural gas prices as a result of the conflict have slowed a long-awaited recovery in Europe's largest economy, which Wambach said was not self-sustaining despite slowly emerging from stagnation.

Germany's governing coalition faces growing pressure from the rise of the far-right AfD, whose successes in recent state elections have intensified concerns among mainstream parties and exposed tensions within the governing alliance. The resignation of Labour Minister Baerbel Bas last week added to uncertainty.

"The latest political developments are likely to have increased uncertainty regarding the swift implementation of the reform plans announced in the summer," said Felicitas Henze, economist at Deutsche Bank Research.

However, a reading by ZEW on views of the current economic situation improved more than expected to minus 35.9 points from minus 47.1 in September.

The German economy ministry ​said earlier this month the Iran war was not hurting the economy ‌as much as feared, as it raised its economic growth forecasts for this year and next.

"Given the high level of outstanding orders, the industry will initially be able to increase its output. This is also the reason for the improved economic outlook," said Thomas Gitzel, chief economist at VP Bank.

The German economy grew by 0.3% in the second quarter. A "surprisingly robust" first half should support growth in 2026, Gitzel said, with the ZEW survey indicating no significant new momentum in the last three months of the year after the economy likely made little progress in the third quarter.

The results were based on ZEW survey responses from 178 analysts and institutional investors from October 12 to 19.

(Reporting by Linda Pasquini, Editing by Ludwig Burger and Xevi Fontdegloria)