Mood brightens in German economy

The mood in the German economy, Europe's biggest, is brightening data showed on Monday, fuelling hopes that the eurozone's current recession may be nearing an end.

The Ifo economic institute's closely watched business climate index rose to 105.9 points in June from 105.7 points in May, the think-tank said in a statement.

This measure of confidence is a leading indicator of the likely trend of activity.

While the increase was much more modest than the rise in the Ifo index seen in May, it showed that the German economy "is continuing to hold its course," insisted Ifo economist Kai Carstensen.

"Although assessments of the current business situation are slightly less positive, firms are increasingly optimistic with regard to their future business outlook," said Ifo economist Kai Carstensen.

Ifo calculates its headline index on the basis of companies' assessments of their current business and the outlook for the next six months.

The sub-index measuring current business slipped to 109.4 points in June from 110.0 points in May. But the outlook sub-index jumped to 102.5 from 101.6 points.

The rise in business confidence in Germany is good news, coming after recent data showing that consumer confidence in the eurozone as a whole is also improving and the outlook for private sector business activity is getting better.

"Today's Ifo index is really good news," said UniCredit economist Andreas Rees.

The improvement in business expectations "conveys a powerful message to financial markets. German companies have been able to withstand the recent downward pressure coming from the Chinese economy. This is not a small achievement," Rees said.

China is now the fifth most important single export market for German companies and both Chinese soft and hard data have kept on coming in on a weak note in the last few months, raising concerns about the negative effects on German exports.

But Berenberg Bank Christian Schulz was also confident that Germany has put the worst of the crisis behind it.

"With tensions in the eurozone fading again after the early spring wobbles around Italy and Cyprus, Germany's economy looks set to continue its healthy rebound," he said.

German gross domestic product (GDP) expanded by just 0.1 percent in the first three months of this year, after contracting at the end of last year, but growth is widely expected to gather momentum again during the course of 2013.

Natixis economist Johannes Gareis said that the sharp rise in Ifo's expectations sub-index "indicates that the German economy is managing to continue to grow and to defy any concerns for growth that appeared recently."

-- Concern about outlook in France, China --

ING DiBa economist Carsten Brzeski said the German economy "seems to be cruising along nice and steady, defying any growth concerns."

But looking ahead, main risks for the German economy would "come from the outside," Brzeski said.

Domestic demand would remain solid this year, driven by low inflation, low interest rates and latest wage increases.

But the main risks for the German economy were stagnating growth in its main eurozone trading partners, above all France, and a hard landing of the Chinese economy.

Capital Economics economist Jonathan Loynes was similarly cautious.

The latest Ifo reading "echoes the slightly firmer tone of other recent indicators, but certainly does not point to any sort of boom in the eurozone's biggest economy," he said.

"The survey is far from perfect as a guide to GDP growth and June's rise was driven entirely by an increase in expectations, while the current conditions index actually fell back slightly, suggesting that the German economy is not yet recovering strongly," Loynes argued.

Postbank economist Thilo Heidrich said that "all in all, the Ifo reading confirms our expectations for the rest of the year.

"After its weak performance at the turn of the year, the German economy should stabilise and gradually pick up speed," Heidrich said.