German confidence on an upward trend

June 16, 2009

, FRANKFURT, June 16 – A key signal that the German economy, the biggest in Europe, could be past the worst of its recession flashed on Tuesday when the ZEW confidence index leapt to a more than three-year high point.

The ZEW index, which measures the confidence of financial market players, surged by 13.7 points in June from the previous month to 44.8 points, the institute said, the eighth rise in a row and the highest level since May 2006.

Analysts had forecast a much smaller gain to 37 points in Germany, which is in the midst of its worst recession since World War II.

A statement quoted ZEW president Wolfgang Franz as saying: "The assessment of the experts indicates that the economic downturn dynamics are currently coming to rest."

In addition to the jump in the expectations indicator, current conditions were assessed as better for the first time since September 2008, gaining 3.1 points to minus 89.7 points, the institute said.

That should come as good news to Chancellor Angela Merkel who faces a general election in just over three months.

"The repeated recovery of economic sentiment reveals a consolidating optimism among the financial market experts, even though the industrial production and incoming orders do not yet show a clear upward trend," the statement added.

German industrial orders and output posted record drops in April, challenging widely-held views among experts that the historic recession has reached a bottom.

Postbank economist Fabienne Riefer noted that "the exit from recession should nonetheless be arduous," and the Ifo survey of business confidence due next Monday should give a more comprehensive idea of overall German sentiment.

The government expects Germany\’s export-oriented economy to contract by six percent this year, and the European Bank for Reconstruction and Development\’s chief economist warned Monday that the broader global economy still faced tough times.

"I don\’t think the worst is behind us … We\’ve not seen everything yet," Erik Berglof told senior business delegates at the Forbes CEO forum in Gleneagles, Scotland.

Unemployment, which is rising in Germany and across the 16-nation eurozone, where a record 1.2 million people lost their jobs in the first three months of the year, represents a major obstacle to an economic rebound.

But economist Jennifer McKeown at Capital Economist said: "The sharper than expected rise in the German ZEW index confirms that more and more investors expect economic conditions to improve, albeit from an extremely weak starting point."

ZEW also said the 271 experts it surveyed reported "increasing confidence in the further development of the banking sector. This can be seen as a positive signal with respect to future lending conditions by banks."

The European Central Bank warned Monday of risks still facing the sector, and said eurozone banks might have to take another 283 billion dollars (205 billion euros) in writedowns by the end of 2010, mainly to account for risky loans.

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