MANNHEIM, Germany (Reuters) -- German analyst and investor sentiment dropped in July for the first time in nine months, weighed down by concerns about tighter credit conditions and suggesting any economic recovery in Europe's largest car market will be slow.
The Mannheim-based ZEW economic think tank said on Tuesday its monthly index of economic sentiment fell for the first time since October 2008, registering 39.5 in July after 44.8 in June.
The fall, which went against expectations for a rise, followed a run of hard data last week pointing to a stabilization in industry. A senior government official also said last week the economy may have exited a recession in the second quarter.
"The figures are disappointing. They reflect a certain skepticism that has recently returned to the stock and bond markets," said Ralph Solveen from Commerzbank.
German companies are still struggling for the most part, although automakers have stood out in recent months thanks to government incentives that have boosted new-car sales to record levels.
Mercedes-Benz parent Daimler AG said late last month its key E class luxury sedan has supported earnings in the second quarter and bolstered its optimism that the worst is finally behind it.
Europe's largest automaker, Volkswagen AG, also said last month that a revamped model range led by a its Golf compact had helped it to outperform competitors in May thanks to rising sales in Germany and China.
Concerns about credit
Germany's economic outlook is overshadowed by concerns among policymakers that banks are not passing to businesses liquidity they have accessed from the European Central Bank -- a scenario they fear could throttle the recovery just as it gets going.
ZEW economist Michael Schroeder said survey respondents were concerned about the risks of a credit crunch despite lending figures showing this was not a problem at the moment.
"A considerable risk for the future development of the German economy is whether lending to firms and households works out," the ZEW said in a statement.
ZEW President Wolfgang Franz said on Tuesday that Germany is unlikely to see sizeable economic growth in the rest of 2009, though a recovery could begin in 2010.
"What we're likely to see in the next few months is a kind of undulating economy with gross domestic product growth of round about nil -- at times slightly above, at times slightly below," Franz told Germany's ARD television.
Signs the economy could be turning around to break four straight quarters of contraction intensified last week after a senior official, speaking on condition of anonymity, told Reuters that Germany may have exited a recession in the second quarter of this year.
Surprisingly robust industrial orders and output data had also boosted recovery hopes after previous sentiment gains. Output grew in May at its fastest rate in 16 years and orders surged to a near two-year high.
"The markets did not respond very positively to good economic news, such as incoming orders," said Andreas Scheuerle from Dekabank. "This was a sign that after the euphoria, skepticism was taking hold and so we have seen a setback."
The ZEW survey did have a bright side however, as the index remained above its historical average of 26.3, while a separate gauge of current conditions posted its second straight gain after eight months of decline, inching up to -89.3 from -89.7.
"The stabilization of the German economy is under way but it will not be as strong as latest data could make us believe," said Carsten Brzeski from ING Financial Markets.
Germany has passed twin stimulus packages the government says are worth some 81 billion euros, although big chunks of state aid are still tied up by red tape and much is unlikely to filter through to the real economy until late next year.