Optimism rises in German economy

BERLIN: Confidence among German firms rose to a six-month high in May, a key sentiment index showed on Monday, suggesting that Europe's top economy might be pulling out of its worst slump in over 60 years.

The closely watched Ifo indicator rose for the second consecutive month to 84.2 from 83.7 in April, adding to evidence that sentiment is again on the up in Germany, the world's top exporter.

The result was slightly worse than expected, however. Analysts surveyed by Dow Jones Newswires had expected the index to rise to 85.0.

The survey "points to a gradual stabilisation of economic output at a low level," the Ifo institute's head Hans-Werner Sinn said in a statement.

Economists see the index as a key leading indicator to gauge the future health of the economy. It had been falling steadily -- with occasional blips -- since June 2008 as sentiment among firms plummeted due to the financial crisis.

"The good news clearly is that German companies will leave the valley of tears in a few months' time," said Andreas Rees, from Italy's UniCredit bank.

Tempering the optimism, however, was a sub-index showing that companies' view of the current situation in Germany dropped in May to 82.5, its lowest level ever.

Rees said this sub-index showed that the German economy was unlikely to recover from the slump as quickly as it plunged into it.

"Looking at the current assessment reading, one thing has also become crystal-clear: The recession will continue for the time being," he said.

Marco Bargel, an analyst at Postbank, also drew a sharp distinction between the two indices.

"All in all, the survey results suggest that we are over the worst of this downturn," he said.

"But the renewed bad assessment of the current situation shows that the way out of this recession will be difficult and definitely not smooth."

Nevertheless, brighter signals are increasingly emerging from Germany to pierce the overall gloom surrounding Europe's economic powerhouse.

Industrial orders and exports recently showed their first increases after falling for several consecutive months.

And another closely watched sentiment index, which measures the outlook of players in the financial markets, also rose to a near three-year high in May after a seventh rise in a row, data from the ZEW institute showed on Tuesday.

Economists said the outlook for Germany's heavily export-driven economy was brightening as signs of recovery spread around the world with more positive news also from Japan and the United States.

Last Monday, US Treasury Secretary Timothy Geithner said the US economy had begun to stabilise, although he warned that a recovery would be "bumpy" and "fragile."

And Japan's central bank offered a more optimistic view of prospects for the world's second-largest economy earlier Monday, saying it saw a gradual leveling-out.

Despite the brighter outlook for the economy, some top policymakers have been at pains to point out that any return to growth will only come next year.

While a scheme to allow firms to put workers on temporary contracts rather than lay them off has kept a lid on unemployment, jobless numbers are up, ensuring the economy will be a major battleground in elections in September.

The German government is expecting the economy to shrink by an eye-watering six percent this year -- the worst contraction in modern German history -- only creeping back into the black in 2010, with output up by a measly 0.5 percent.

The president of the country's powerful central bank, Axel Weber, was quoted as saying on Friday that the recession in Germany would continue until to the end of the year with any recovery coming only next year.