April 24 (Bloomberg) -- German business confidence rebounded more than economists forecast from a 26-year low in April as interest-rate cuts and government stimulus packages boosted expectations that the recession will ease later in 2009.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 83.7 from 82.2 in March. Economists expected a gain to 82.3, the median of 36 forecasts in a Bloomberg News survey showed.

The European Central Bank has signaled it will cut its benchmark rate to a new record low next month and Chancellor Angela Merkel’s coalition plans to spend about 82 billion euros ($107 billion) to stimulate growth, including tax breaks and investment in infrastructure. Even so, Germany’s leading economic institutes predict the economy, Europe’s largest, will shrink by 6 percent this year, the most since World War II.

“With another round of downward revisions to the German growth forecasts, it is very easy to simply run with the pack and to dismiss first signs of green shoots,” said Carsten Brzeski, senior economist at ING Groep NV in Brussels. “However, these green shoots are there. The free-fall of the economy seems to have come to an end.”

Ifo’s measure of expectations increased to 83.9 from 81.6 and a gauge of current conditions rose to 83.6 from 82.7. The euro rose after the report and European government bonds erased gains.

‘Not Out of the Woods Yet’

“Today’s data will bolster hopes that the worst of the recession may now be past in Germany and the wider euro area,” said Colin Ellis, an economist at Daiwa Securities SMBC Europe Ltd. in London. However, “the economy is definitely not out of the woods yet.”

Bundesbank President Axel Weber said the German economy probably contracted 3 percent in the first quarter, which would be the most on record. “Maybe we’ll see positive growth rates in 2010,” he said at a press conference in Washington today.

A global slump in export demand has forced companies to scale back production and cut jobs. First-quarter profit at Volkswagen AG, Europe’s biggest carmaker, slumped 74 percent. It plans to drop 16,500 temporary workers worldwide this year.

Germany will lose 1.4 million jobs this year and next, pushing the average number of unemployed to a five-year high of 4.7 million and the jobless rate to 10.8 percent by the end of 2010, the economic institutes said in a report yesterday.

‘Deepest Recession’

“Germany finds itself in the deepest recession since the establishment of the federal republic” in 1949, they said.

It is not alone. Spain’s unemployment rate rose to a 10- year high of 17.4 percent in the first quarter, the Madrid-based National Statistics Institute said today. In the U.K., the Office for National Statistics said the economy shrank 1.9 percent in the first quarter from the fourth, the most since 1979.

Still, the Ifo report is the latest sign that the recession may ease in Germany. The country’s manufacturing and service industries contracted at the slowest pace in five months in April, a survey of purchasing managers by Markit Economics showed yesterday. Investor confidence rose to the highest level in almost two years.

Praktiker AG, Germany’s second-biggest home-improvement retailer, said on April 22 that sales improved this month after a tough first quarter, in which its operating loss more than doubled from a year earlier. “The first quarter was disappointing, but it doesn’t give an indication of where 2009 is going,” Chief Financial Officer Thomas Ghabel said.

Call for ECB Action

Daimler AG, the world’s second-largest maker of luxury vehicles, said April 8 it anticipates a “gradual improvement” in profit after a probable first-quarter loss.

The German government’s stimulus package includes a 2,500- euro payment for people who scrap their old cars and buy new ones.

The ECB has also slashed borrowing costs. The central bank this month lowered its key interest rate to a record low of 1.25 percent and signaled it is likely to trim it by another quarter point in May.

Ifo economist Gernot Nerb called on the ECB to cut its key rate to 0.5 percent and start an asset-purchase program to pump money into the euro-region economy. “Despite the slight improvement, we need further stimulus,” Nerb said.

To contact the reporter on this story: Jana Randow in Frankfurt jrandow@bloomberg.net.

Last Updated: April 24, 2009 10:58 EDT