RTTNews - Results of a closely watched survey showed Tuesday that German economic sentiment improved significantly in June to mark a three-year high on the back of expectations of a recovery by year-end.

Rising for the eighth month in a row, the ZEW Indicator of Economic Sentiment for Germany stood at 44.8 points in June, up from 31.1 points in May. The latest reading, which is the highest since May 2006, came much better than the 34 points expected by economists. Further, the June reading is above the indicator's historical average of 26.3 points.

In the latest ZEW survey, 271 financial experts took part. The headline indicator reflects their assessment on the expected economic development in Germany in six months.

Financial experts' view on the current situation in the largest Eurozone economy improved for the first time since September 2008. The corresponding indicator rose to minus 89.7 points from minus 92.8. Economists were looking for a reading of minus 92.6.

The repeated recovery of economic sentiment reveals a consolidating optimism among the financial market experts, even though the industrial production and incoming orders do not yet show a clear upward trend, the Mannheim-based ZEW, other wise called the Center for European Economic Research said in a statement.

Citing the increasing confidence among survey experts regarding further development of the banking sector, ZEW said this can be seen as a positive signal with respect to future lending conditions.

According ZEW President Wolfgang Franz, experts are further seeing tendencies for a recovery at the end of this year. This cautious optimism should not be destroyed by overly pessimistic projections.

Recent survey data have pointed to improving conditions in various sectors. The purchasing managers' indicators for both manufacturing and services sectors rose in May. The Ifo business confidence indicator improved in May for the second consecutive month after reaching a record low in March.

The German annual inflation rate in May reached the lowest level since 1987 on easing energy and food prices. Factory orders stabilized in April after rising in March for the first time since August 2008.

That said, the Bundesbank turned more pessimistic about the economy in its latest macroeconomic forecasts. The Buba expects the gross domestic product to contract 6.2% in 2009, a sharp downward revision from a 0.8% decline predicted in December last year.

The German central bank said downward pressure on the economy is likely to ease during the course of 2009, although it does not look like there will be a significant upturn in the near future. The economy had record contraction of 3.8% in the first three months of the year, which was the fourth straight quarter of decline.

Commerzbank analyst Simon Junker said, With the huge slump of the German economy in the first quarter (by 3.8%), the worst should now be behind us. The analyst expects the economy to shrink in the second quarter, though not as sharp as in the last two quarters.

The latest ZEW reading has given reliable signals in the past for turning points in industrial production, Junker said. It now suggests that this will reach the trough in the next few months. The analyst sees more upside potential for the ZEW index in the coming months.

The Buba said unemployment is likely to increase by more than a million to 4.4 million on an annual average in 2010. This corresponds to an unemployment rate of 10.5%, up from 8.4% this year.

Further, the ZEW survey showed that the economic expectations for the Eurozone improved in June, with the relevant indicator rising 14.2 points to 42.7 points. Economists had expected a figure of 34. The gauge for the current economic situation in the euro zone moved up 2.5 points to minus 90.7 points.

Majority of the survey participants expect the European Central Bank to maintain the key interest rate in the next six months. On June 4, the ECB kept its key interest rate unchanged at a record low level of 1% as the 16-nation economy faces its worst recession since the World War II. The central bank also has announced plans to buy covered bonds worth 60 billion euros.

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