May 20 (Bloomberg) -- The recession in Germany is showing signs of easing after the economy, Europe’s largest, contracted the most on record in the first quarter, the Bundesbank said.

“The pace of contraction has weakened and some leading indicators have noticeably recovered,” the Frankfurt-based Bundesbank said in its monthly bulletin today. It will take time for the full impact of the government’s stimulus program and the European Central Bank’s “very expansive monetary policy” to flow through, it added.

Chancellor Angela Merkel’s coalition has pledged to spend about 82 billion euros ($112 billion) to haul Germany out of its worst recession since World War II, and the ECB has cut its benchmark interest rate to a record low of 1 percent. The economy contracted 3.8 percent in the first quarter from the fourth, the most since records began in 1970. The government expects it to shrink 6 percent this year.

While investor confidence increased to a three-year high in May and exports unexpectedly rose in March, the Bundesbank said the global financial crisis will continue to weigh on Germany for some time.

“In extensive parts of the economy there probably won’t be a need in the foreseeable future to extend or modernize existing machinery and equipment,” the Bundesbank said. Companies may “increasingly reduce their workforce. The process has already begun.”

The Bundesbank said it expects “some considerably negative” inflation developments over the coming months, reflecting swings in crude oil prices rather than “general deflationary tendencies.”

There are signs suggesting “an easing in downward pressures on the global economy,” the report said. “It seems that the lost confidence is gradually returning.”

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

Last Updated: May 20, 2009 06:00 EDT