Trade dispute, Brexit angst weigh on German investor morale

By Michael Nienaber

BERLIN (Reuters) - German investor morale darkened more than expected in October, a survey showed on Tuesday, as concerns about an escalating Sino-U.S. trade dispute and Britain crashing out of the EU without a divorce deal clouded the outlook for Europe's largest economy.

The ZEW research institute's monthly survey showed economic sentiment among investors deteriorated to -24.7 from -10.6 in September.

This undershot a Reuters consensus forecast for a smaller drop to -12.0. The indicator reached the same low-point as in July, the lowest reading since August 2012.

"Expectations for the German economy are dampening above all due to the intensifying trade dispute between the USA and China," ZEW researcher Achim Wambach said.

"A further negative influence on economic and export expectations is the danger of a 'hard Brexit', which is becoming ever more likely."

The United States and China are in a bruising tit-for-tat tariffs dispute that threatens to hurt global growth as well as "innocent bystander" nations, IMF Managing Director Christine Lagarde has said.

British Prime Minister Theresa May's speech to parliament on Monday showed that reaching a deal on the country's exit from the European Union will be even harder than expected, a senior EU official said on Tuesday.

A separate ZEW gauge measuring investors' assessment of the economy's conditions fell to 70.1 from 76.0 in the previous month. The Reuters consensus forecast was for 74.5.

Wambach pointed to political uncertainty at home as another factor behind the growing pessimism among German investors.

"The situation of the governing coalition in Berlin is perceived to have become more unstable, which also weighs on economic sentiment," he said.

German Chancellor Angela Merkel vowed on Monday to restore trust in her government after the Bavarian sister party of her conservatives suffered heavy losses in a regional election.

The German economy is expected to have shifted into a lower gear over the summer months, but the economy ministry has said it expected growth to pick up again in the fourth quarter.

For the full year, the government has lowered its growth forecast to 1.8 percent from 2.3 percent previously as trade tensions abroad and a lack of skilled workers at home limit the room for economic expansion.

The government has also blamed slower production in the auto sector due to difficulties adjusting to a new pollution standard - the Worldwide Harmonised Light Vehicle Test Procedure (WLTP).

(Reporting by Michael Nienaber; Editing by Robin Pomeroy)