Germany expecting economic slump despite improving sentiment

The ZEW index notched up its first positive reading in almost two years, pointing to a possible pick-up in Europe's biggest economy in the second half of 2009.

The index, which measures the confidence of players in financial markets, rose by 16.5 points from minus 3.5 points in March to 13 points in April, the sixth consecutive rise and the first positive reading since July 2007.

The result was much better than expected, and suggested that it was "even becoming more likely that the economy will slowly recover in the second half of this year," the ZEW's president Wolfgang Franz in a statement.

"Along with other indicators, the ZEW sentiment indicator reveals that there are well-founded expectations that the downward dynamics of the business cycle are bottoming out," he added.

The institute, which surveys around 350 fund managers, economists and analysts every month, said that the uptick was thanks to the German government's efforts to stimulate the economy, and to low inflation.

Those surveyed were also more positive about economic prospects in the eurozone as a whole, the United States and China, the ZEW said. Indications from elsewhere have also suggested that there may be light at the end of the tunnel for the world economy, which according to the International Monetary Fund is suffering a prolonged and deep recession.

The Organisation for Economic Cooperation and Development (OECD) said earlier this month that fragile signs were emerging in some major economies that the worst slowdown in decades is easing.

In Germany, data showed industrial output falling 2.9 percent in February from January, much less than the 6.1 percent slump seen the previous month and beating analysts' expectations.

German Chancellor Angela Merkel said at a large trade fair on Monday that the large number of exhibitors was perhaps a "small signal that we are slowly reaching the low point."

But the world economy, Germany included, is still a long way from being out of the woods.

A report in Germany's Süddeutsche Zeitung on Tuesday said that the

government is preparing to revise sharply downwards its current forecast for

2009 output to a fall of five percent.

Government sources told the paper that a severe slump in industrial orders was behind the grim downward revision.

“The government agrees that there will be a reduction of five percent at the end, even when some coalition leaders try to optically improve the official estimate by slipping a four before the decimal,” the paper said.

Berlin had previously forecast a contraction of gross domestic product (GDP) by 2.25 percent for 2009, but the first quarter has been so disappointing that experts have said for weeks that was far too optimistic.

But Chancellor Angela Merkel has set about spreading economic good cheer, saying on Monday at the Hannover industrial technology fair that the country may have reached the low point of the recession.

The German Engineering Federation (VDMA) is also hoping for a swift stabilisation.

“We estimate the end of the present downswing in new orders by mid-year,” VDMA head Hannes Hesse said. But he added that the industrial sector would likely produce 20 percent less than in 2008 and shed some 25,000 jobs.

Meanwhile the German Electrical and Electronic Manufacturers' Association (ZVEI) predicted a 10 percent drop in production, with some two-thirds of workers already suffering from reduced hours and layoffs on the horizon, the paper reported.

Mario Gruppe, economist at German bank NordLB, said the ZEW figures were "to be welcomed" but stressed: "For us, it is still too early to sound the all-clear."

"We warn against too much euphoria. There are still some painful months

ahead of us," he said.