FRANKFURT, Germany (AFP) — The pall of gloom hanging over the German economy, Europe’s biggest, deepened in October as investment sentiment turned negative and fell to its lowest level in nearly two years, a survey showed yesterday.

The widely watched investor confidence index calculated by the ZEW economic institute fell by 10.5 points to minus 3.6 points in October, its lowest level since November 2012, and the first time since then that it has been in negative territory, ZEW said in a statement.

It was the 10th month in a row that the index has fallen.

“ZEW’s financial market experts expect the economic situation in Germany to decline further over the medium term,” said ZEW president Clemens Fuest.

“Geopolitical tensions and the weak economic development in some parts of the eurozone, which is falling short of previous expectations, are a source of persistent uncertainty. These factors are tarnishing growth expectations in Germany,” Fuest said.

A raft of recent disappointing data, including factor orders, industrial production, and foreign trade “have likely contributed to the growing pessimism among financial market experts,” ZEW added.

Only last week, the country’s leading economic institutes slashed their growth forecasts for both this year and next.

And the German government is scheduled to publish its own latest updated forecasts later today.

In the wider eurozone, industrial output fell by 1.8 per cent in August, the latest data showed, a steep drop and another sign that recession in the 18-nation currency bloc could return.

For its survey, ZEW questions analysts and institutional investors about their current assessment of the economic situation in Germany, as well as their expectations for the coming months.

The sub-index measuring financial market players’ view of the current economic situation in Germany fell by 22.2 points to 3.2 points in October, its lowest level since June 2010.

A frequent criticism of the ZEW index is that it can be volatile and is therefore not particularly reliable.

Berenberg Bank economist Christian Schulz said the drop in October was bigger than expected.

“The ZEW highlights that the latest sell-off in European equity markets… risks reinforcing the confidence hit which, like in a game of dominoes, has spread from German investors via German manufacturing to German consumers and the rest of the eurozone throughout this year,” Schulz said.

“Underlying economic data so far were not nearly as bad as the August declines in industrial output and orders suggested, but we have slashed our short-term forecasts for Germany and the eurozone since August and now expect stagnating output in the third and fourth quarters and only a modest pick-up in early 2015,” the expert said.

But “due to a very healthy labour market, low debt and rising real incomes, Germany is in a good position to weather the downturn and emerge from it strongly next year,” Schulz added.

Capital Economics economist Jennifer McKeown said that the combined fall in eurozone industrial production and the sharp drop in German ZEW investor sentiment “add to the risk that the single currency area may be entering its third recession in six years”.