The car business remains in the doldrums

Ifo's business climate index rose from 88.8 points in June to 89.2 in July, somewhat short of analysts' expectations, but enough for the the institute to tip a recovery.

"Based on previous experience, an improvement in the Ifo business climate three months in succession signals a coming economic upturn," Ifo president Hans-Werner Sinn said.

The index reflects hopes rather than actual economic output, which remains defiantly sluggish.

In recent months, German business optimism has tended to increase, as the government of Chancellor Gerhard Schroeder pushed through promised reforms without strong opposition.

Ups and downs

Financial markets barely reacted to the news, which contributes to a highly mixed picture for the German economy.

Economic performance remains dismal, and in some aspects is even continuing to worsen.

The Bundesbank last week revised down already gloomy industry output and manufacturing data.

Key industrial sectors such as car making are in particularly poor shape, especially given the historically strong euro.

But some economists are now starting to argue that government reforms and tax cuts could boost output next year.