Political considerations apparently weighed heavily on the economic expectations of German institutional investors and analysts in September. The Frankfurt based, Center for European Research (ZEW) reported that the number of those expecting better conditions six months from now over those expecting worse conditions fell from 50% in August to 38.6% in September. Although most of the 309 respondents to the survey reported before the election took place, the 44 replies that were received after the September 18 election showed a significantly lower reading than the overall September results.

Preliminary results of the September 18 election indicate that the CDU/CSU, (The Christian Democratic Union and The Christian Social Union) won 225 seats; the SPD (Social Democratic Party), 222; the FDP (The Free Democratic Party), 61; the Left Party, 54 and the Greens, 51. The Left Party, formerly known as Party for Democratic Socialism consists largely of former communists and former SPD members who disagreed with the party's plans for reform. The inconclusive results of the election will have to be resolved by some sort of a coalition or, if that fails before October 18 when Parliament is set to open, by another election. Political uncertainty is likely to continue to cast a cloud over the economic outlook.

Important as the effects of political uncertainty on confidence may be, the rise in energy prices resulting from hurricane Katrina has also had a depressing effect. In spite of the deterioration in expectations, investors reported a slight improvement in what they judged to be, according to the negative figures, depressing current conditions. In September, there was a three percentage point improvement in the appraisal of current conditions as the excess of pessimists over optimists (noted by a negative) went to -58.1% from -61.1% in August.

The attached chart shows the month-to-month changes in the German investors' appraisal of current conditions and their expectation of conditions six months from now.