BERLIN (AP) -- Business confidence in Germany, Europe's largest economy, dropped to a new all-time low in June but expectations for the future continued to improve, a closely watched survey showed Monday.
The Munich-based Ifo institute's business climate index -- an average of its current situation and future expectations numbers -- improved overall to 85.9 points from 84.3 the month before, the third consecutive increase since March when the indicator hit a 26-year low of 82.2 points.
"The survey results confirm that the German economy is gradually stabilizing," Ifo president Hans-Werner Sinn said in a statement.
The survey, based on around 7,000 monthly responses from firms in manufacturing, construction, wholesaling and retailing, showed a jump in expectations for the next six months, which improved from 86 to 89.5.
The current situation assessment, however, slipped to 82.4 from 82.5 the month before.
"The pattern suggests that there will be a much reduced pace of contraction during the remainder of 2009 and possibly even an odd quarter of marginally positive growth," said Timo Klein, an economist with IHS Global Insight. "But a sustained return to positive quarterly GDP growth still appears unlikely ahead of mid-2010, when massive fiscal and monetary policy measures at home and abroad can be expected to unfold their biggest impact."
Germany, Europe's biggest economy, went into recession last year as the global crisis sapped demand for its exports.
While surveys of business and investor confidence have turned upward recently, forecasts remain gloomy. The country's central bank predicted this month that the economy will shrink by 6.2 percent this year and stagnate in 2010.
Expectations in the manufacturing and wholesaling and retailing sectors improved, while they remained stable in the construction industry.
In manufacturing, businesses indicated that they expected the decline in exports to ease somewhat. They also said that "employment plans are less negative than they were in the previous month, but are still clearly aimed at personnel reductions," Ifo said.
Germany's jobless rate dropped slightly to 8.2 percent in May, thanks to a regular spring boost, but showed no signs of a lasting recovery. The government has predicted that the number of Germans out of work will average some 3.7 million this year -- an increase of some 450,000 from 2008 -- before rising more sharply next year to 4.6 million.
Alexander Koch, an analyst with the HVB-UniCredit Group noted that even with the rise in expectations for the next six months, "the current level of 89.5 still remains below the historical threshold level for zero annual growth in industrial production of 93."
"And the record low situation component clearly underscores that the German economy was still in recession in the second quarter," he said.