European investor confidence increased for the first time in seven months in January, rebounding from a record low on interest-rate cuts and government measures to stimulate the economy. An index measuring euro-region sentiment rose to minus 34.4 from minus 42.3 in December, the steepest increase since August 2005, when the announcement of early German elections boosted morale, the Limburg, Germany-based Sentix research institute said in a statement today. The December reading was the lowest since the measure was first compiled in 2002. “People realize that the measures put under way by central banks and governments will show some effect,” Patrick Hussy, an economist at Sentix, said in a telephone interview. “The dynamic of the increase is promising and mustn’t be underestimated. It came as a surprise but suggests the light at the end of the tunnel has appeared.” The euro region fell into its first recession in 15 years after the financial-market crisis locked up interbank lending, eroded export demand and damped investment. The European Central Bank expects the economy of the nations using the euro to shrink 0.5 percent in 2009, the first full-year contraction since 1993. A sub-index measuring expectations rose to minus 31.5 from minus 42 in December. A gauge of current business conditions in the euro region increased to minus 37.25 from 42.5 in the previous month. The monthly survey of more than 2,900 investors, which isn’t adjusted for seasonal changes, was conducted Dec. 4 to Dec. 6. The results are never revised. Borrowing Costs The ECB has cut interest rates by a total of 175 basis points since early October and its governing council is expected to lower borrowing costs further at next week’s meeting, Eonia forward contracts indicate. Economic recovery may not begin until next year and policy makers have the scope to cut interest rates if inflation slows further, ECB Vice President Lucas Papademos said on Jan 3. While it is premature for the central bank to revise its projections, the ECB “cannot rule out that economic activity in 2009 may turn out to be weaker than suggested,” he said. European manufacturing contracted at the fastest pace on record in December, according to a survey of purchasing managers. Services shrank for a seventh month, preliminary data show. Sentix usually is the first indicator to signal a turning point in economic development, said Hussy, who expects stock markets to rise again in the third or fourth quarter. “Currently, a series of recovery months is built in the data,” he said. “We are talking three to four months, if not more.” German investor confidence unexpectedly rose for a second month in December, bucking the trend of a slumping economy.

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