June 22 (Bloomberg) -- German business confidence rose for a third month in June, providing further evidence that the recession in Europe’s largest economy is easing.

The Ifo institute in Munich said its business climate index, based on a survey of 7,000 executives, increased to 85.9 from 84.3 in May. Economists expected a gain to 85, the median of 34 forecasts in a Bloomberg News survey showed. The index reached a 26-year low of 82.2 in March.

Germany’s worst economic slump since World War II may be bottoming out as a global recovery improves prospects for exports. Manufacturing orders held steady in April after increasing in March and investor confidence rose to a three-year high in June. The coalition government led by Chancellor Angela Merkel, who faces national elections in September, is spending about 85 billion euros ($118 billion) to stimulate growth. Still, the Bundesbank expects the economy to shrink 6.2 percent this year and stagnate in 2010.

“The recession isn’t over yet, but the worst may lie behind us,” said Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “The economic stimulus package is supporting the economy as well as the expectation that foreign demand will pick up again.”

Ifo’s measure of expectations increased to 89.5 from 86 while a gauge of current conditions eased to 82.4 from 82.5. The euro fell a third of a cent after the report to $1.3860.

‘Stabilizing’ Economy

The current situation “is still very bad,” Ifo economist Gernot Nerb said in a Bloomberg Television interview. “We can say the economy is stabilizing; it’s too early to say the upswing has started.”

Siemens AG, Europe’s largest engineering group, this month reiterated sales and earnings targets for the current year and Praktiker AG, Germany’s second-biggest home-improvement retailer, said last month revenue has rebounded in its domestic market since the end of March.

“The difficult economic environment will continue for the coming months,” Siemens Chief Executive Officer Peter Loescher said today in a Bloomberg Television interview. “The decline is decelerating, so we can realistically hope that we are now approaching the low point,” he later told a telephone conference.

Germany’s manufacturing and service industries contracted more slowly in May and unemployment rose less than economists forecast.

Export Rebound

“Inventories are almost empty in many countries, so even a slight increase in demand means production goes up,” said Andreas Rees, chief German economist at UniCredit MIB in Munich. “The positive trend is intact, exports will rebound in the course of the year.”

Some companies are less sanguine.

“With the exception of China, global passenger-car markets are not showing any signs of recovery” and may not have “hit rock bottom yet,” Volkswagen AG’s group sales chief Detlef Wittig said on June 12.

Deutsche Lufthansa AG, Europe’s second-biggest airline, said last week it will trim costs further to avoid a loss this year.

The European Central Bank has cut its benchmark interest rate to a record low of 1 percent. It will offer to lend banks as much money as they want for 12 months in a new auction this week to help get credit flowing again.

ECB council member Ewald Nowotny said in an interview published today that the bank is likely to hold interest rates steady into 2010 to help the euro-region economy recover.

The economy is in a “stabilization phase,” Bundesbank President Axel Weber said last week. “However, we’re far away from a significant pickup.”

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

Last Updated: June 22, 2009 06:03 EDT