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German investor morale surges, economists wary

German analyst and investor sentiment rose in June to its highest level since May 2006, a survey showed, but economists warned that Europe's largest economy remained in a tough spot.

Germany is facing this year its deepest post-war recession, but the rise in the Mannheim-based ZEW think tank's economic sentiment poll chimed with some other signs of a recovery on the horizon after a record contraction in the first quarter.

Economy Minister Karl-Theodor zu Guttenberg said there were signs the economy was bottoming out.

“A sort of trough has been reached,” he told reporters.

The ZEW said on Tuesday its monthly poll of economic sentiment rose for an eighth straight month to 44.8 from 31.1 in May, surpassing the consensus forecast in a Reuters poll for a rise to 35.0. A separate gauge of current conditions rose to -89.7 from -92.8. A reading of -92.8 had been forecast.

The euro jumped to the day's high against the dollar and Bund futures fell after the data release, though economists cautioned against reading too much into the firmer numbers.

“The survey gives the impression that we could be looking at normal economic activity again by the end of the year. We do not see things this way,” said Rainer Sartoris at HSBC Trinkaus.

“Survey participants are somewhat removed from the real situation, which is still very bad,” he added.

The ZEW index was based on a survey of 271 analysts and investors and conducted between June 2 and June 15, ZEW said.

Finance ministers from the Group of Eight economic powers also struck a note of caution at a weekend meeting, noting in their communiqué that: “There are signs of stabilization in our economies... but the situation remains uncertain and significant risks remain to economic and financial stability.”

Leading German companies are still finding business conditions difficult.

German industrial conglomerate Bosch expects revenue in its core car parts business to decline by about a fifth this year in line with global production volumes, the head of the company's car parts division, Bernd Bohr, told Reuters.

Volkswagen also sees a weak business environment.

“With the exception of China, global passenger car markets are not showing any signs of recovery. It is not clear whether the markets have hit rock bottom yet,” Volkswagen sales chief Detlef Wittig said on Friday.

However, some German leading indicators have shown improving conditions.

Purchasing manager surveys released earlier this month showed activity in Germany's private sector shrank at its slowest pace in seven months in May and business expectations in the services sector surged to a 16-month high.

“The good news about the ZEW index is that the assessment of current conditions improved slightly. That is supporting the market a bit,” said Commerzbank economist Hans-Juergen Delp.

“But it will only be able to breathe easy when hard data on the real economy confirm this,” he added.

Highlighting the tough environment, unemployment increased for the seventh straight month in May and economists expect it to keep rising into next year.

The economy contracted by a record 3.8% in the first quarter of this year and the government expects gross domestic product (GDP) will contract by 6% over the full year.

ZEW economist Peter Westerheide said it might be too much to expect positive economic growth rates by the end of the year, but there would be an improvement. (Reuters)