An unexpected surge in a closely watched German economic indicator yesterday fuelled hopes of a recovery in the euro-zone's largest economy early next year.
The ZEW research institute said its expectations index rose for the eighth month running in August, jumping ahead of expectations by 10.6 to 52.5 after soaring 20.6 to 41.9 in June.
The rise helped to underpin a further rally in European stock markets, which have climbed to 11-month highs amid hopes that an accelerating pick-up in the US will drive a global recovery.
But economists warned there was a widening discrepancy between surveys of business expectations in the euro zone and solid economic data, which remain uniformly bleak.
Yesterday's output data for June sowed further disappointment. Euro-zone industrial production declined more than expected in June, falling 0.1 per cent on the month and by 1.6 per cent for the year, according to Eurostat, the European Union's statistics agency.
Gross domestic product figures last week showed output in the 12-nation bloc stagnated in the second quarter of this year, as recession gripped Germany, Italy and the Netherlands.
Eurostat also confirmed that weak growth and subdued consumer demand had kept the lid on price pressures, with euro-zone inflation easing to 1.9 per cent in July from 2 per cent in June.
Core inflation, which excludes volatile food and energy prices, also edged down to 1.9 per cent - the first time it has been below 2 per cent since March 2001.
Mannheim-based ZEW said its index, which is seen as a reliable indicator of the more widely watched Ifo business climate index, pointed to "recovery at the beginning of next year".
The Ifo index, out next week, is expected to show a further rise for August, its fourth successive improvement.
ZEW said the rise in optimism was based on a revival of the US economy and stronger-than-expected German orders for June.
Unexpectedly high earnings at some companies also helped.
But economists at BNP Paribas said the latest jump in the ZEW index, which is based on responses from financial analysts, should be interpreted with caution.
"The index is a good leading indicator for the turning points in a growth cycle but may overstate the pace of the upturn," they said.
Last year the index massively exaggerated the scale of industrial recovery, rising to the high 60s before tumbling to a low of 0.6 per cent in December.
Most economists remain cautious about the pace of a pick-up, which is not expected to gather momentum until next year.
Mr Mark Wall of Deutsche Bank said: "We are at the bottom . . . and things are probably turning. But the question now is, how quickly will we rise off the bottom?"
Most economists believe the recovery could face strong head-winds for some time, although tax cuts in Germany and a rise in US activity should ensure a euro-zone turnaround.
But uncertainty still surrounds the future course of the euro, which has fallen below $1.11, down from its May peak of $1.19.
