Shrinking household incomes and rising fuel prices that risk sapping the lifeblood from a nascent recovery gave Europe's car executives little reason for cheer at the Geneva Auto Show, which usually marks a crucial spring thaw in industry sales.

Leading economic indicators have rebounded from the lows late last year while stock and bond markets have rallied since January, prompting some economists to begin revising forecasts upwards in expectation of business activity bottoming out.

But there could be a long timelag before any pick-up in the broader economy trickles down to European consumers, as cash-strapped governments take their pound of flesh from shoppers in an attempt to shore up their sagging tax base.

Exacerbating things, record high oil prices in Europe force drivers to reach deeper into their pockets to fill up the tank.

We have no indications that make us believe things will improve in six months time, said Christian Klingler, Volkswagen's head of sales, during the show.

Many governments need money, so we've seen changes to the tax code since the first of January, in Belgium, in Spain and in Italy for example, where they were kind enough to shift the burden onto car drivers, and that naturally has effects on purchasing behaviour, said Klingler.

That VW's sales chief is so glum about Europe despite tentative signs of an improvement, is particularly alarming as the industry heads into the second quarter, when car buyers in major markets like Germany and France are usually most active.

SHALLOWER RECESSION

Goldman Sachs now forecasts a shallower recession for the euro zone, admitting it underestimated how much the ECB's 3-year loans, and less stringent collateral rules would ease concerns over bank funding and peripheral sovereign debt markets.

We thought that the weakness of economic activity seen in Q4 2011 would intensify at the turn of the year, it wrote last month. The evidence suggests otherwise.

German car dealer Paul Ebbinghaus immediately noticed an impact on his business after policymakers in Europe seemed to have built a firewall strong enough to protect Italy and Spain from the worst fallout of Greece's debt crisis.

New orders were truly horrible in November and December, when no one knew whether the euro would still exist in the future, the owner of 7 showrooms in and around the industrial city of Dortmund told Reuters.

But ever since mid-January, when the euro crisis no longer always made headlines on the 8 o'clock news, business has bounced back to last year's levels.

Jonathon Poskitt, sales forecaster at LMC Automotive, agreed that the improved liquidity at banks was at the least a positive start, even if the ECB's efforts to kickstart the economy were not yet feeding through to increased consumer credit.

Only a few weeks ago risks were skewed more to the downside, whereas things are now looking more positive, he said. We're still cautious though, since hopes that we were out of the woods have repeatedly proven false in the past.

South Korean carmaker Hyundai <005380.KS> isn't convinced, and wants to slash inventory and meet its market share targets early to shield itself from any possible dangers down the road.

It's such a recent phenomenon. My planning for the year is still where it was in January, which is to make a fast start and get ahead of the game, said Allan Rushforth, Senior Vice President of Hyundai Motor Europe, in an interview.

Ebbinghaus, whose business makes about 100 million euros in annual revenue selling some 5,000 new and used cars, readily admits that Germany is a rare bright spot and what's good for the consumer is not always good for dealers or carmakers.

What worries me are the high inventories. New cars intended for southern Europe are showing up here in Germany since it is the last healthy market left and that's driving down prices.

One manifestation has been a continued high number of new car registered by dealerships and manufacturers directly -- often seen as a last resort to meet quarterly sales targets. Germany's ZDK federation for motor trade has estimated this is double the level it considers healthy.

Research firm Markit estimates output in the auto industry contracted further last month compared to January, making it the fifth worst performing sector out of 22 in the euro zone.

A poisonous brew of high public and private sector debt, austerity, record unemployment and falling disposable income led Fiat CEO Sergio Marchionne to warn last week that Europe was at a critical juncture, with its car market poised to stagnate for three years under even his most optimistic forecast.

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Geneva Auto Show TAKE A LOOK:

Geneva slideshow: http://www.reuters.com/news/pictures/slideshow?articleId=USRTR2YX5F

Graphic on European car registrations: http://r.reuters.com/cyz86s

Graphic on Euro Zone auto industry: http://link.reuters.com/tyd96s

Reuters Insider TV: http://link.reuters.com/ved96s

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OIL THE NEXT GREECE

Some of the very medicine the ECB used to treat the debt crisis -- quantitative easing in the form of bond buys and three-year unlimited loans --- may also be partly responsible for creating a new risk.

Brent crude oil topped $128 a barrel on Thursday, levels not reached since July 2008. Petrol prices have in turn risen at an annual rate of 9.3 percent in the euro zone.

Warning last week that oil is the new Greece, HSBC Chief Global Economist Stephen King said the euro-era record highs were a peculiarity, since the whole idea of monetary policy easing was to try to stimulate activity and demand.

But if the consequence is rising commodity prices, that then eats away at Western real incomes, he said.

The Syrian uprising, fears Israel may attack Iran's nuclear development sites and a crude export ban imposed on the UK and France by the Islamic republic have also driven prices higher.

While German carmakers like Volkswagen, Mercedes and BMW have sailed through the crisis relatively unscathed by serving a growing number of affluent Asian buyers, those focusing only on Europe are not so confident.

I don't believe consumers will suddenly become very optimistic in the coming weeks and in the coming months, said Toyota Motor Europe President Didier Leroy, worried that the big crisis of confidence was a long-term issue for the market.

Many people said the first half will be difficult, the second half will recover. Very frankly speaking, nobody knows -- nobody knows what will happen.

(Additional reporting by Hyunjoo Jin in Geneva; Editing by Helen Massy-Beresford)