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German investor sentiment brightens on euro zone outlook

By Sakari Suoninen and Victoria Bryan

MANNHEIM, Germany (Reuters) - German analyst and investor sentiment jumped more than expected in September thanks to the improved outlook for the euro zone, a survey showed on Tuesday in welcome news for Chancellor Angela Merkel who is seeking a third term in an election on Sunday.

A monthly poll of economic sentiment rose to 49.6 from 42.0 in August, ZEW economic think tank said, reaching the highest level since April 2010 and surpassing the consensus forecast in a Reuters poll for a rise to 46.0.

The survey sent the euro to a session high against the dollar but analysts cautioned that the sentiment index could prove volatile and the economy still faced significant headwinds as evidenced by recent disappointing economic data.

"This is a clear sign that the German economy is benefiting from the stabilisation of the euro zone," Stefan Schilbe at HSBC Trinkaus said. "The good development on equity markets will have also played a role. The (German benchmark) DAX (.GDAXI) yesterday reached a record high."

The euro zone emerged from a 1-1/2 year-long recession in the second quarter, with growth of 0.3 percent.

Germany, Europe's largest economy and bastion of strength throughout the crisis, has led the bloc's recovery so far, posting bumper 0.7 percent growth in the second quarter, bouncing back from a winter spell of weakness.

"This (German growth) was one of the main reasons of this continuing increase in expectations for Germany," said ZEW economist Michael Schroeder. "Another reason is the better outlook for the whole of Europe, which stimulates exports."

Schroeder said expectations for expansion in German domestic demand had risen but not as much as expectations for growth in the export-oriented sector, thanks to the surprise news that the euro zone was out of recession.

German data has been mostly positive of late, in particular forward-looking sentiment surveys, yet industrial and trade data for July were downbeat.

"The German economy is moving forward but it is still against significant headwinds," said David Brown at New View Economics. "The weaker parts of the euro zone economy are still casting a long shadow."

The index was based on a survey of 260 analysts and investors conducted between September 2 and September 16, ZEW said.

(Writing by Sarah Marsh, Editing by Gareth Jones)