German Business Sentiment Probably Rose for Third Month in June

By Christian Vits

June 22 (Bloomberg) -- German business confidence probably rose for a third month in June, providing further evidence that the recession in Europe’s largest economy is easing.

The Ifo institute in Munich will say its business climate index, based on a survey of 7,000 executives, increased to 85 from 84.2 in May, according to the median of 29 forecasts in a Bloomberg News survey. The index reached a 26-year low of 82.2 in March. Ifo releases the report at 10 a.m. today.

Germany’s worst economic slump since World War II may be bottoming out as a global recovery improves prospects for exports. Manufacturing orders held steady in April after increasing in March and investor confidence rose to a three-year high in June. The coalition government led by Chancellor Angela Merkel, who faces national elections in September, is spending about 85 billion euros ($118 billion) to stimulate growth. Still, the Bundesbank expects the economy to shrink 6.2 percent this year and stagnate in 2010.

“Optimism is the wrong word,” said Holger Schmieding, chief European economist at Bank of America-Merrill Lynch in London. “Pessimism is abating. There’s evidence that the global economy has seen the trough and while Germany won’t immediately benefit, it will profit disproportionately later due to its focus on investment goods.”

Economists predict executives’ assessment of the current situation as well as their expectations will improve.

Signs of Improvement

Siemens AG, Europe’s largest engineering group, this month reiterated sales and earnings targets for the current year and Praktiker AG, Germany’s second-biggest home-improvement retailer, said last month revenue has rebounded in its domestic market since the end of March.

“There are signs which show that we already reached the bottom of the recession and that it will go up again soon,” Chief Executive Officer Wolfgang Werner told Praktiker shareholders on May 27.

Germany’s manufacturing and service industries contracted more slowly in May and unemployment rose less than economists forecast.

“Inventories are almost empty in many countries, so even a slight increase in demand means production goes up,” said Andreas Rees, chief German economist at UniCredit MIB in Munich. “The positive trend is intact, exports will rebound in the course of the year.”

Some companies are less sanguine.

“With the exception of China, global passenger-car markets are not showing any signs of recovery” and may not have “hit rock bottom yet,” Volkswagen AG’s group sales chief Detlef Wittig said June 12.

The economy is currently in a “stabilization phase,” Bundesbank President Axel Weber said last week. “However, we’re far away from a significant pick-up.”

The European Central Bank has cut its benchmark interest rate to a record low of 1 percent. It will offer to lend banks as much money as they want for 12 months in a new auction this week to help get credit flowing again.

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