Jan. 27 (Bloomberg) -- Confidence among manufacturers in Italy, Europe's fourth-biggest economy, probably rose in January for the first month in three as the euro's drop brightened the outlook for exporters, a survey of economists showed.

The Rome-based Isae institute's confidence index, based on a survey of 4,000 executives, may have increased to 89.2 from December's 88.9, according to the median forecast of 23 economists surveyed by Bloomberg. Estimates ranged from 87 to 90.5. The report will be released at 9:30 a.m. today.

``Business is responding positively to the fact that things might be perking up a bit after the euro stopped rising so steeply,'' said Luigi Speranza, an economist at BNP Paribas SA in London, who predicts an increase to 90.2.

The euro's 5 percent decline from a Dec. 30 record against the dollar may have eased concern about slowing exports, which account for 28 percent of gross domestic product. Like Germany, Italy relied on overseas demand to pull its economy out of recession in 2003 as consumer confidence and spending declined.

Executives in Germany, Italy's biggest trading partner, were also encouraged by the currency's retreat. Business sentiment in Europe's biggest economy rose to an 11-month high in January, the Munich-based Ifo institute said yesterday.

The euro's gains last year dented earnings of Italian companies such as motorcycle maker Ducati Motor Holding SpA and prompted Fiat SpA Chairman Luca Cordero di Montezemolo to say Dec. 9 that exporters were ``very worried.'' Industrial production fell 0.7 percent in November, the biggest drop in five months, national statistics office Istat said Jan. 18.

Consumers Key

Gains in exports remain critical to sustain a recovery, because they are still few signs of a pickup in domestic demand. Confidence among consumers, whose spending accounts for two-thirds of the economy, fell in January for a third month, Isae said Jan. 25. Confindustria, Italy's employers lobby, and Confcommercio, which represents 780,000 retailers, in December slashed their forecasts for Italian household spending in 2005.

``The key to the outlook of executives is an improvement in consumer spending,'' said Emilio Braga, an economist at Gestioni Di Patrimoni SIM in Milan. ``Business optimism should improve as the euro's increase against the dollar slows, and as consumer spending recovers.''

That lack of demand is hurting sales at Italy's biggest manufacturers. Fiat's share of the Italian market, which accounts for 40 percent of sales, slumped to a record low in December. Fiat says its market share will probably hold at 2004 levels this year.

`Modest Growth'

The Italian economy will grow 1.5 percent in 2005, lagging the 2 percent average of the dozen countries sharing the euro, the European Commission predicts. Only the German and Dutch economies will perform worse, according to the commission's estimates.

``The situation is one of extremely modest growth and this will continue for the first part of the year,'' said Lorenzo Codogno, co-head of European economics at Bank of America Corp.

In an effort to boost consumer spending and growth, the government of Prime Minister Silvio Berlusconi scrapped plans for corporate tax breaks in favor of 6 billion euros ($7.9 billion) in income-tax cuts that took effect this month.

Isae surveys Italian mining and manufacturing companies in the first two weeks of each month, asking about production, orders, inventories, prices and jobs. Its business confidence index, which is adjusted for seasonal variations, peaked at 116 in 1973. The low was 53 the following year.

To contact the reporter on this story: Flavia Krause-Jackson in Rome at fjackson@bloomberg.net.

Last Updated: January 26, 2005 19:13 EST