A key measure of German business sentiment rose in May and Japan raised its economic outlook for the first time in three years in further signs the worst of the global recession may be over, with stability seen later in 2009.

News of North Korea's second nuclear test, a significantly more substantial device than used in the first test in October 2006, was shrugged off by European and Asian markets quietened by British and U.S. holidays on Monday.

Analysts said the test was more a negotiating tactic than an imminent threat to security on the peninsula.

German think tank Ifo's business climate index, based on a poll of 7,000 firms, rose to 84.2 in May from 83.7 in April but below a consensus forecast for 85.0.

This is a further clear signal that the German economy's tailspin has ended. The recession has lost its velocity. It could even be over by the autumn, Commerzbank economist Joerg Kraemer said, adding: No one should overestimate the strength of the upturn. It will be an expansion without any real power.

JAPAN, GERMANY FORESEE IMPROVEMENT

In Tokyo, the government raised its outlook for Japan's economy for the first time in three years, saying the pace of recession was slowing as exports and industrial output appeared to be near the bottom.

Previously, the government had said the economy was worsening rapidly and in a severe state.

Separately, Bank of Japan governor Masaaki Shirakawa also said both the Japanese and world economies appeared to be bottoming out but any recovery would be mild because it would take time to get rid of the excess of boom years.

European Central Bank governing council member and German Bundesbank president Axel Weber said there were growing signs the economic decline in Germany and euro zone was ebbing.

But those signs were sporadic and should not be overplayed, although the impact of government stimulus programs would hopefully build through the rest of the year, he said.

There is definitely hope that the euro zone economy will gradually stabilize in the later part of 2009.

Market regulators in China and Australia said they would relax restrictions imposed during the worst of the financial crisis, suggesting they think the market recovery is on solid ground.

THAI RECESSION

Thai officials also said the worst may be over after data showed Thailand's economy shrank a larger-than-expected 1.9 percent in the first quarter, dragging the country into its first recession in a decade after a plunge in exports.

A fall in household consumption and investment in fixed assets deepened in the first quarter from the fourth quarter of 2008, but construction, agriculture and services all swung to growth.

In the United States, the Federal Reserve is likely to keep interest rates near zero for a while yet, Fed Vice Chairman Donald Kohn said over the weekend.

The economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households, Kohn said.

Equity markets have stalled since hitting 2009 highs last week on worries that recent powerful gains might have outpaced signs the global economic slump was abating.

While policymakers remain cautious, global stock markets have enjoyed a powerful two-month rally on hopes the worst of the world's deepest economic slump in decades may have passed.

MSCI's World index <.MIWD00000PUS> hit a six-month high last week, up 43 percent from its March low.

In a further sign frozen financial markets are thawing, India's top mobile operator, Bharti Airtel , unveiled a plan to buy 49 percent of South Africa's MTN Group as part of what it said was a $23 billion deal.

RISK OF SOCIAL CRISIS

But the slow pace of recovery in the global economy and rising unemployment could bring the threat of social crisis and protectionism, World Bank President Robert Zoellick said.

What began as a great financial crisis and became a great economic crisis is now becoming a great crisis of unemployment, and if we don't take measures there is a risk of a great human and social crisis, with major political implications, he said in an interview with Spanish Sunday newspaper El Pais.

(Additional reporting by Dave Graham in Berlin, Samuel Shen in Shanghai, and Mette Fraende in Sydney; editing by Mike Nesbit)

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