German Business Confidence Rises for a Second Month

By Christian Vits

May 25 (Bloomberg) -- German business confidence rose for a second month in May as interest-rate cuts and government stimulus packages boosted expectations that the worst recession since World War II will ease later in the year.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 84.2 from 83.7 in April. Economists expected a gain to 85, the median of 39 forecasts in a Bloomberg News survey showed. The index reached a 26-year low of 82.2 in March.

Chancellor Angela Merkel’s coalition is trying to pull Germany out of recession with a spending plan worth about 82 billion euros ($115 billion.) While the government expects the economy to contract 6 percent in 2009, Bundesbank President Axel Weber says there are “some grounds” to be optimistic about a recovery later this year.

“While the increase in the Ifo index was less than expected, the message is still positive,” said Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt. “The worst is over, but we won’t see a crackling recovery.”

While Ifo’s measure of expectations increased to 85.9 from 83.9, a gauge of current conditions fell to 82.5 from 83.5. The euro fell a third of a cent after the report to $1.3958.

Rate Cuts Urged

“The expectations are signaling that we are approaching the lower turning point, however the current situation’s still weak,” said Ifo economist Gernot Nerb. “We certainly would propose cutting interest rates further, to come down to 0.5 percent.”

The European Central Bank this month reduced its benchmark rate to 1 percent, a record low, and ECB President Jean-Claude Trichet didn’t rule out taking it lower still. “We did not decide that the new level of our policy rates was the lowest level,” he said.

The global slump in demand is forcing companies to scale back production and cut jobs as earnings wilt.

“Capacity utilization is extremely low, more companies will go bankrupt and the labor market will suffer,” said Peter Meister, an economist and bond analyst at BHF Bank in Frankfurt. “We’ll see a certain stabilization of the economy, but this won’t be a proper upswing.”

Germany’s leading economic institutes predict the country will lose 1.4 million jobs this year and next, pushing the average number of unemployed to a five-year high of 4.7 million. German unemployment rose for a sixth straight month in April, taking the jobless rate to 8.3 percent.

Signs of Stabilization

Metro AG, Germany’s largest retailer, on May 5 reported a wider first-quarter loss as slumping consumer spending hurt revenue.

Still, German manufacturing activity contracted at the slowest pace in seven months in May, Markit Economics said May 21, and investor confidence rose more than economists forecast this month, climbing to a three-year high.

“The pace of contraction has weakened and some leading indicators have noticeably recovered,” the Bundesbank said in its monthly report last week. It will take time for the full impact of the government’s stimulus program and the ECB’s “very expansive monetary policy” to flow through, it added.

“There are some grounds for being optimistic,” Weber said in London on May 13. “However, it is certainly not advisable to be overly optimistic that the recovery process is safely on track.”

To contact the reporter on this story: Christian Vits in Frankfurt cvits@bloomberg.net