Jan. 27 (Bloomberg) -- German business confidence unexpectedly rose for the first time in eight months after the European Central Bank lowered interest rates and the government doubled its economic stimulus package to fight the recession.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 83 from 82.7 in December. Economists expected a drop to 81, the median of 37 forecasts in a Bloomberg News survey shows.

Chancellor Angela Merkel’s coalition this month agreed to spend about 80 billion euros ($105 billion) over two years to stem the worst recession since World War II. The International Monetary Fund expects Germany’s economy, Europe’s largest, to contract 2.5 percent this year.

The increase in the Ifo index “is a small ray of hope, but it doesn’t necessarily mean that the worst is over,” said Holger Schmieding, chief European economist at Bank of America Corp. in London. “The outlook remains for the economy to shrink significantly in the first and second quarters, bottom out in the third and start to recover in the fourth.”

The euro rose more than half a cent to $1.3330 after the Ifo report. While a sub-index measuring executives’ assessment of current conditions fell to 86.8 from 88.8, a gauge of expectations rose to 79.4 from 76.9.

Government Spending

The government’s spending plan amounts to about 1.6 percent of gross domestic product, making it the biggest stimulus program in Europe. The cost of crude oil has also dropped almost 70 percent from a July peak of $147 a barrel, damping inflation and increasing consumers’ and companies’ purchasing power.

Ifo said an index measuring sentiment among retailers rose to -26.6 from -30.4.

“The substantial improvement in the retail sector suggests that the rapid downward trend in inflation and the fiscal package is expected to support private spending,” said Alexander Koch, an economist at UniCredit Group in Munich. “The vicious circle has been broken.”

Siemens AG, Europe’s largest engineering company, said today it will avoid a slump in sales this year even as the global economy contracts. The company is sticking to its 2009 profit goals, boosted by orders from the government’s economic stimulus package for infrastructure and its planned 16,750 job cuts.

Global Recession

Still, the global recession has damped export demand, prompting companies to curb output. German manufacturingorders extended their worst decline on record in November, industrial production fell for a third straight month and exports plunged 10.6 percent from October.

Volkswagen AG and Bayerische Motoren Werke AG said this month they’ll reduce hours for a total of 86,000 workers to rein in production as the global slowdown saps demand for vehicles.

“Nobody can make reliable forecasts for 2009,” Lothar Steinebach, Chief Financial Officer at Henkel AG, the German maker of Persil detergent, said Jan. 24. “At the moment we cannot call the bottom of this downturn.”

In the U.S., the Conference Board’s index of consumer confidence fell to 37.7 in January, the lowest since records began in 1967, the private research group said today.

Australian business confidence rose in December from a record low as a government stimulus package and interest-rate cuts buoyed consumer spending.

‘Very Good News’

Stabilizing business expectations may pave the way for an economic recovery to begin in Germany in the second half of the year, said Andreas Scheuerle, an economist at DekaBank in Frankfurt. The ECB will cut interest rates further, “but won’t keep up the speed with which it has acted until now,” he said.

The ECB this month cut its benchmark lending rate by half a percentage point to 2 percent, the fourth reduction since early October, and signaled another move is likely in March.

The increase in German business confidence is “very good news,” ECB council member Ewald Nowotny said today.

Bundesbank President Axel Weber, also a member of the ECB’s Governing Council, said yesterday he expects a first-quarter contraction in Germany to be “followed by a phase of stabilization and in the next year a slight revival.”

To contact the reporter on this story: Christian Vits in Frankfurt at cvits@bloomberg.net

Last Updated: January 27, 2009 10:26 EST