Signs of rebound in Germany

January 28, 2002 Posted: 1103 GMT

LONDON (CNN) -- German business confidence rose for the third straight month in January, a sign that Europe's largest economy may be headed for recovery.

The country's key economic barometer, the Ifo monthly survey of 7,000 west German executives, edged up to 86.3 points last month. The consensus forecast was for 85.7 points.

"The Ifo survey is really quite encouraging," Audrey Childe-Freeman, an economist at CIBC World Markets, told Reuters.

"It is basically suggesting that we can now conclude that we have reached a bottom and that things may start to brighten up a little bit."

The January Ifo number was up from 84.9 points in November and an estimated 85.8 points in December -- though changes to survey procedures resulted in no survey being conducted that month, with the December figure being calculated based on the November and January surveys.

Meanwhile in east Germany, the main business climate index rose to

98.5 from 97.3 in November.

Another Ifo index, gauging the business outlook by companies six months ahead, also rose for the third straight month to 94.8 points.

The surveys appear to support the German government's contention that the economy will recover in the second quarter of this year, despite preliminary data earlier this month that indicated the economy had been shrinking since the middle of 2001.

The Federal Statistics Office said Germany's gross domestic product grew by just 0.6 percent last year, compared to a 3-percent expansion in 2000.                 It was the lowest annual growth rate since the 1993, when the economy shrank 1.1 percent.

The office did not provide figures for the fourth quarter, but many economist believe the economy contracted by 0.5 percent in the last quarter  – meaning the Germany economy had technically slipped into recession.

"The Ifo is probably at the upper end of expectations, but at the end of the day it's nothing to write home about," Jeremy Hawkins, an economist at Bank of America, told Reuters.

"We've yet to see the pre-September levels being attained. It's a move in the right direction but still indicative of only a gradual recovery."

However, economists believe any apparent upswing in German economy may convince the European Central Bank to keep interest rates at their current levels.

"It [the economic recovery] is probably going to be firm enough for the ECB to hold steady for the time being, but certainly the risks at this stage are that they may be forced to cut again at some point," Hawkins said.

The ECB has its key interest rate by 1.5 percentage points in the past year and now stands at 3.25 percent.