German business morale improved more than expected in October, following five consecutive months of decline, a survey showed on Wednesday, but economists still fear a recession.

The Ifo institute said its business climate index stood at 86.9 versus the 85.9 reading forecast by analysts in a Reuters poll, following a slightly revised reading of 85.8 in September.

Companies were somewhat more satisfied with the current business situation and managers were also less pessimistic about the coming months, the survey showed.

“Germany’s economy can see a silver lining ahead,” Ifo president Clemens Fuest said.

However, the low level of the Ifo business climate index continues to suggest a contraction of the German economy in the second half of the year, said Joerg Kraemer, chief economist at Commerzbank.

The German economy is seen at risk of sliding into its second technical recession in a year after shrinking in the last quarter of 2022 and the first quarter of 2023.

Kraemer doesn’t expect a strong recovery next year, as the interest rate hikes of the European Central Bank are still having an impact on the economy.

“In addition, companies are unsettled by economic and climate policy, especially since Germany’s attractiveness as a business location has eroded over the past 15 years,” Kraemer said.

It is difficult to see a ray of hope, said Alexander Krueger, chief economist at Hauck Aufhaeuser Lampe Privatbank.

“The Middle East conflict is likely to have been a brake on expectations,” Krueger said. “Growth hopes remain buried for the next few months.”

Sentiment among German managers improved in manufacturing, services and construction, while it declined in trade, the survey showed.

Meanwhile the bank lending across the eurozone came to a near standstill last month, European Central Bank data showed on Wednesday, providing further evidence that the 20-nation bloc was skirting a recession.

Growth indicators from industrial output data to PMI and sentiment readings in recent weeks are all suggesting that euro zone’s economy is now either stagnating or even shrinking as weak external demand, consumer caution and high interest rates are exerting their toll.

Lending to businesses expanded by just 0.2 per cent in September, the lowest figure since late 2015 when the bloc was just emerging from its debt crisis, and down from 0.7 per cent a month earlier.

Still, detailed data suggest that underlying trends may be more nuanced as the monthly flow of fresh loans was a positive 14.0 billion euros, reversing much of the previous month’s negative 19.9 billion euro reading.

Lending is taking a hit after a string of interest rate hikes took the ECB’s key rate to a record high 4 per cent last month, all in the hope this would depress activity enough for inflation to return to 2 per cent.

Lending to households meanwhile rose by just 0.8 per cent after a 1.0 per cent increase in August with the monthly flow of loans at a positive 4.5 billion euros, ECB data showed. The ECB’s own survey of the bloc’s biggest banks show they plan to further curb businesses’ access to credit in the fourth quarter and also see waning demand for loans.

The M3 measure of growth money supply, seen in the past as a good indicator of future economic expansion, meanwhile contracted by 1.2 per cent, an improvement on the 1.3 per cent drop a month earlier and better than the minus 1.7 per cent reading expected in a Reuters poll.

German investor morale improved more than expected in October, the ZEW economic research institute said, as market experts forecast a further decline in inflation while warning the economic situation remained challenging.

The institute’s economic sentiment index rose to -1.1 points from -11.4 points in September. Analysts polled by Reuters had projected an October reading of -9.3.

“It seems that we have passed the lowest point,” ZEW president Achim Wambach said. The expectations index rose for the third straight month, suggesting respondents of this survey expect the economic situation in Germany to improve over the coming six months.

“These figures signal that a rebound is coming, but perhaps a little later than previously expected,” said Melanie Debono, senior Europe economist at Pantheon Macroeconomics. She noted also that any rebound would likely be unimpressive.

With inflation rates expected to decrease further, three-quarters of respondents anticipated stable short-term interest rates in the eurozone, according to the survey.

Factors such as the Israel-Hamas conflict - cited by some respondents as a reason for revising their growth forecasts downward - had only limited impact on the overall more optimistic outlook, Wambach said.