Sept. 9 (Bloomberg) -- Italian business confidence rose the most in almost two decades in August, as signs of a recovery in neighboring countries such as Germany boosted optimism Europe's fourth-biggest economy is emerging from recession. An index based on a survey of 4,000 executives increased to 95.3, the highest since September last year, from a revised 86.7 in July, the Rome-based Isae institute said. The monthly gain is the biggest since Isae began the survey in 1986. ``It seems like the recovery is accelerating,'' said Pasquale Pistorio, chief executive officer of STMicroelectronics NV, Europe's largest semiconductor maker, in Cernobbio, Italy. The jump in Italian business confidence is the latest sign of a rebound in the $8 trillion economy of the 12 nations sharing the euro. The region's economy shrank 0.1 percent in the second quarter, the second contraction since the start of the euro in 1999, the European Union's statistics office said today.
Evidence of a recovery has increased in the past month as the outlook for European services and manufacturing industries improved. The services industry, which accounts for more than half the region's economy, expanded in August at the fastest pace in more than a year. Business confidence in Germany, the region's biggest economy, advanced to a 14-month high in August. The European Commission, based in Brussels, left last month's forecasts for the second half unchanged, predicting growth between zero and 0.4 percent in the third quarter, and between 0.2 percent and 0.6 percent in the fourth.
`Catching Up'
Before today's report Italy had shown few signs of a rebound. Consumer confidence fell in August and remains near the 6 1/2-year low set in June, a report from Isae showed last week. The business confidence report ``is the first really positive signal to come from Italy after a series of disappointments,'' said Luigi Speranza, an economist at BNP Paribas in London. ``Italy is catching up.'' A drop in inventories and an increase in orders help boost expectations that production in Italy is recovering, the report showed. The index for orders rose to -16 from -23, the highest since January. Inventories dropped to the lowest since March, while expectations for an increase in manufacturing in the next three months gained to 18 in August from 3 the previous month The main index was expected to gain to 88.5, according to the median forecast of eight economists surveyed by Bloomberg. The confidence index fell to a record low of 72 in November 1992, during Italy's previous recession. The measure peaked in May 2000 with a reading of 108.3.
Euro Effect
Italian bonds fell on expectations that economic growth will rebound. The yield on Italy's 4 3/4 percent bond maturing in 2013 rose 2 basis points to 4.347 percent. A basis point is 0.01 percentage point and moves inversely to price. Some of the gain in confidence can be attributed to the drop in the euro, which has slipped 6.6 percent since reaching a record $1.1933 on May 27. Companies ranging from Volkswagen AG to Fiat SpA have said the strength of the euro eroded sales in the first half. The Dow Jones Stoxx 50 Index has rebounded about 34 percent from a six-year low reached in March. Italy's benchmark Mib30 stock index has gained almost 28 percent from its March low and has advanced almost 10 percent this year. The index fell 0.7 percent to 26,143 at 12:30 p.m. in Milan. The gains in the euro in the first half hurt exports and contributed to the economies of Germany, France and Italy, which account for more than two-thirds of the gross domestic product of the dozen euro nations, contracting in the second quarter.
Tax Cuts
The governments of Germany and France, the biggest buyers of Italian goods, are cutting taxes and boosting spending to spur growth even if it means defying European Union rules to limit budget deficits to no more than 3 percent of GDP. The European Central Bank has trimmed borrowing costs three times since December, bringing the benchmark rate to 2 percent. Investors don't expect the ECB to cut rates again this year. The gap between the current three-month rate of 2.15 percent and the three-month futures contract that expires in December is 2 basis points, suggesting rates will stay unchanged at least until year-end. Today's survey was compiled by the state-funded Isae institute between August 1 and August 18. //www.bloomberg.com