German sentiment brightens as Euro downturn eases

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German economic sentiment bounced back in August to a four-month high on Tuesday, data released by think tank ZEW showed, offering hope that the euro zone is slowly pulling out of recession.

The economic sentiment index for August climbed to 42.0, according to official data. This was higher than a figure of 36.3 for July and managed to beat estimates in a Reuters poll of 40.0. It marked the highest level since March 2013.

The euro climbed to 1.33 against the dollar following the news, after trading at lows of 1.328 in the session. Yields on Bunds all ticked higher with the interest rate on 10-year German government bonds rising to 1.773 percent after closing the last session at 1.704 percent.

"First signs of an end to the recession in important euro zone countries may have contributed to the indicator's rise," ZEW said in the accompanying press release on Tuesday.

"This is also reflected by the strong increase of economic expectations for the euro zone. Furthermore, the economic optimism is supported by the robust domestic demand in Germany."

Tuesday's data comes ahead of euro zone gross domestic product (GDP) figures due on Wednesday which are expected show the euro zone economy grew 0.2 percent in the second quarter.

Euro zone industrial output data also showed a promising gain on Tuesday, rising at its fastest pace in more than two-and-a-half years in the second-quarter of 2013.

Ben May, a European economist at Capital Economics said that both sets of data provided further evidence that the euro zone has emerged from its recession, but warned that this could be due to expectations of future demand and not actually a pick-up in orders.

"Given this, and the fact that the industrial surveys still only point to small rises in production at best, the pace of expansion may soon ease," he said in a research note on Tuesday. He added that the rise in the German ZEW index of investor sentiment points to healthy annual German GDP growth of around 2 percent. But remained skeptical, saying that the survey has not been a particularly good predictor of growth in the past.