THE German economy is showing some faint signs of a recovery, due mainly to higher export orders, after deteriorating further at the outset of 1996, the Bundesbank has said in its monthly report.

"The economic situation in Germany at the end of 1995 and early in 1996, above all else, further deteriorated," the German central bank said in its monthly report for June.

The report noted German gross domestic product (GDP) fell 0.5 per cent in the 1996 first quarter from the 1995 fourth quarter, due mainly to troubles in the construction industry.

But the Bundesbank said: "Despite the continuous down hearted talk from many companies, the basic economic conditions for a recovery in growth have recently improved."

A "noteworthy" factor supporting hopes of an economic recovery was stable inflation, which the Bundesbank said has been under control since last summer. It said inflationary pressures remain remote because of moderate wage increases agreed for 1997 and under utilised industry capacity.

The report reaffirmed comments made last week by Bundesbank president, Mr Hans Tietmeyer, in Switzerland that he saw a chance of a cyclical upturn in Germany in the course of 1996.

The central bank report said there were no clear signs for an economic break through but that there were still "definitely some rays of hope, particularly in the export business".

The report said foreign orders since last autumn have "clearly risen", due to what it called the mid term "complete correction" of the mark's appreciation in 1995, continuing stable inflation and flexible wage pacts in some German industries.

"German companies are obviously in a situation to participate in the strong expansion of world trade," the Bundesbank report said.

But the report said unemployment "remains the most pressing problem for industry, especially since the hoped for economic improvement can only lead to a small improvement in job levels, and would not likely improve in the near term.

"Even after the generally expected economic upturn in the second half (of 1996) it will only be after a long delay that unemployment will likely gradually fall," the report said.

The German central bank noted that unemployment fell in May on a seasonally adjusted basis to 3.93 million but that it was mostly a normalisation of employment levels after the winter.

In addition, the report said German M3 money supply growth should begin slowing down and that the current strong growth at the moment does not pose any inflationary threat.

Growth in M3, a measure of the amount of money and other relatively liquid financial assets available in Germany, has been bloated by weak money capital formation so far this year as investors refrained from buying bonds, the Bundesbank said.

"The money supply should draw closer to the target corridor in the course of the year to the extent that money capital formation continues to normalise in line with a friendlier climate on the capital market and low short term interest rates," the report said.

April M3 grew at an annualised rate of 11.2 per cent from the final quarter of 1995. Financial markets are waiting for May M3 data which are expected to be released soon.

The Bundesbank also reaffirmed earlier statements that Germany's budget deficit and debt look set to exceed limits set by the Maastricht, Treaty on European Union in 1996, making austerity plans all the more urgent in the crunch 1997 year.