The German economy expanded unexpectedly by 0.3 percent in the second quarter of 2009, bringing an end to the country's deepest recession since World War Two and boosting hopes of recovery in the broader euro zone.

The rise in German gross domestic product (GDP) came as a shock after four consecutive quarters of contraction and mirrored a surprise 0.3 percent rise in France in the April-June period.

Economists had expected GDP in the euro zone's two biggest economies to decline 0.3 percent, and remained divided over whether the pickup signalled a lasting recovery.

"The recession has ended, and it has ended sooner than we all thought," said Andreas Rees at Unicredit. "This is good news."

Germany's Federal Statistics Office said on Thursday that the seasonally-adjusted quarter-on-quarter rise, based on preliminary data, was led by increases in private and public consumption as well as construction.

Despite a drop-off in exports, net trade also made a positive contribution as imports fell at a faster pace.

Still, economists said threats to the outlook remained, including the fragility of the banking sector and the fading impact of government measures to shore up the economy.

"The question is how lasting it will be," said Jens-Oliver Niklasch at LBBW. "There are lots of problems we haven't solved. In particular, the banking sector is still dependent on the state umbrella."

Euro zone government bond futures fell, the euro rose against the dollar and European shares opened higher on the strong data.

Europe's largest economy had suffered a record contraction at the start of 2009, but that first quarter plunge was revised up today to show a fall of 3.5 percent versus 3.8 percent previously.

German sentiment indicators have been on the upswing for months and data released last week boosted recovery hopes.

Manufacturing orders rose at their fastest pace in two years in June on strong foreign demand. Exports, the lifeblood of the German economy, posted their strongest increase in almost three years in the same month.

STABILISATION AND SLOW GROWTH

Economists warned against too much optimism about the pace of recovery. Apart from the fragility of the banking sector, they cited the threat of rising unemployment and declines in consumption as the impact of government subsidies to preserve jobs and boost car sales fades.

"We're entering a phase of stabilisation and slow growth," said Christian Dreger of the DIW economic institute.

"The main risk for Germany is a sharp rise in unemployment. If firms decide to start firing people in the autumn rather than putting them on shorter hours, it's going to have a negative impact on wages and hit consumption."

The government expects the economy to contract by some six percent this year, but the second quarter rise could prompt it to reconsider that forecast.

"I am careful about making forecasts, but there are more and more signs of improvement," Finance Minister Peer Steinbrueck told the Thursday edition of Germany's Bild newspaper. "That makes me optimistic."

Year-on-year, the German economy shrank 7.1 percent in the second quarter, the data showed, following a 6.4 percent drop in the January-March period. The Office is due to publish a detailed breakdown of the second quarter GDP data on Aug. 25.

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