Indicator suggests Germany may escape recession

The ZEW research institute said its index of economic sentiment stood at minus 55.5 points, up 8.4 points from July when the survey hit its lowest level since its creation in December 1991.

"The improvement ... signals that fear about an economic downturn among financial market experts is contained. The recent fall in the price of oil and the weakening of the euro against the dollar must have dampened economic concerns about the economy," the ZEW said.

"Market experts have not been particularly taken aback by the negative growth rate of the second quarter. They expect weaker but all in all solid economic conditions and do not fear a recession."

The ZEW forecast, based on a survey of 300 analysts and institutional investors, was better than expected with economists polled by Dow Jones Newswires looking for a reading of minus 62 points.

Data out last week showed that the German economy, which accounts for a third of total eurozone output, went into reverse in the second quarter for the first time for nearly four years, contracting by half a percent.

The data sent shockwaves through the markets on fears that Europe's powerhouse was headed for recession a year after the subprime crisis began, dragging the entire 15-nation single currency area with it.

With Germany's eurozone partners such as France, Italy, Spain and Ireland also in the doldrums or worse, the bloc's gross domestic product (GDP) fell 0.2 percent in the second quarter, the first contraction since monetary union.

If an economy shrinks for two consecutive quarters it is officially in recession.

Two of the main culprits were rampant energy and food prices putting a squeeze on companies and consumers alike, pushing up prices for manufacturers and blowing a hole in household budgets.

And adding to the squeeze on firms has been the euro's seemingly inexorable rise against the dollar over recent months.

A stronger euro means that exporters get fewer euros for every dollar they are paid for their products, forcing them to raise their prices to levels where they are less competitive than those of their rivals.

But in the past six weeks oil prices have fallen sharply, reaching close to $111 per barrel compared with a high of more than $147 on July 11, and the euro last week hit a six-month low against the greenback.

This also cuts some slack for the European Central Bank.

The ECB has been unable to cut interest rates and therefore spur economic activity because of its strict mandate to keep a lid on inflation - which in July hit a record 4.0 percent in July in the eurozone.

But economists sounded a cautious note.

"Both oil and the euro have only simply corrected their sharp advance of recent months, and both have made strong gains year on year, i.e. are still a strain on the economy," Matthias Rubisch at Commerzbank said.

"Easing pressure from oil and the euro will probably not be sufficient in themselves to trigger a renewed upswing," he said.

Andreas Rees at UniCredit agreed: "(It) has become crystal-clear that markedly slower growth lies ahead, as the negative momentum from the global economy is increasingly carrying over into Germany.

"The euro-dollar exchange rate and the oil price might dampen the slowdown, but certainly cannot prevent it."

The German exporters' federation BGA was also anything but upbeat, forecasting on Tuesday a slowdown in exports growth this year to around five percent from 2007's 8.5 percent.

"I do not believe that the dollar is going to come back to levels where we can really celebrate," BGA head Anton Boerner said. "And for the oil price it is the same."