July 8 (Bloomberg) -- Germany may be shaking off its worst recession since World War II as factories ramp up production to meet rising export orders.

The government said today that industrial output rose 3.7 percent in May from April, the biggest gain in almost 16 years. Yesterday, it said manufacturing orders jumped 4.4 percent in May, the most since June 2007 and nine times the 0.5 percent gain forecast by economists.

“May’s production and order data are really the first hard evidence that the economy is emerging from recession,” said Nick Kounis, chief European economist at Fortis Bank in Amsterdam. “The underlying trend for production is improving dramatically” and suggests that the economy “will grow again in the third quarter,” he said.

That may provide a boost for Chancellor Angela Merkel, who will seek a second term in office in national elections in September. Her coalition government is spending about 85 billion euros ($118 billion) to revive growth in Europe’s largest economy, which it predicts will contract 6 percent this year. Business confidence increased for a third month in June.

“Soft-data green shoots have started carrying over into hard economic data,” said Andreas Rees, chief German economist at UniCredit MIB in Munich. “After the summer break, the odds are rising that the German economy will manage a comeback into growth territory.”

Merkel Preferred

Support for Merkel’s Christian Democrats rose to the highest this year as Germans showed a preference for her leadership over that of the rival Social Democrats, according to a poll published by Stern magazine and RTL television today.

German carmakers in particular are increasing output as a government incentive to trade in old vehicles boosts sales at home and depleted global inventories bolster export demand.

Volkswagen AG, Europe’s largest carmaker, said on July 3 that car deliveries rose for a second straight month in June. MAN SE, Europe’s third-largest truckmaker, said the same day it probably broke even in the second quarter as the market for commercial vehicles showed signs of recovery.

The increase in factory orders in May was driven by an 8.2 percent gain in exports to countries outside the euro region. Domestic demand rose 3.9 percent.

Governments worldwide have announced about $2 trillion in economic stimulus programs to help revive economic growth. Munich-based Siemens AG said on June 22 this may generate orders of about 15 billion euros ($21 billion) for Europe’s largest engineering company.

Brown’s Warning

British Prime Minister Gordon Brown is warning that policy makers mustn’t become too complacent that the worst of the recession is over. In the U.K., Germany’s third-largest trading partner, factory production unexpectedly fell for the first time in three months in May.

Rising unemployment may also curb household spending in Germany and damp any economic recovery. The country’s jobless rate rose to 8.3 percent last month. It will reach 10.5 percent next year, according to the Bundesbank.

“Although there may well be setbacks in the coming months, the trend in production should point upwards,” said Ralph Solveen, an economist at Commerzbank AG in Frankfurt. That increases chances that the German economy will return to growth in the third quarter, he said.

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net

Last Updated: July 8, 2009 09:01 EDT