IMPROVING INVESTOR sentiment in Germany bolstered hopes yesterday that the worst of the world recession may be over, but a surprisingly weak report on the US housing market served as a reminder the road to recovery may be rocky.

German investors and analysts grew much more optimistic in May that economic conditions will be brighter later this year, although they were unexpectedly glum about how bad things are right now.

In a sign that the battered banking sector may finally be emerging from crisis mode, large US banks including Goldman Sachs and Morgan Stanley have applied to repay billions of dollars they borrowed from the government, according to sources familiar with the matter.

Adding to the somewhat brighter outlook for banks, Britain has held talks with investors to gauge their interest in buying its stakes in part-nationalised lenders, but is in no rush to exit, a government source said.

But a report showing US housing starts fell to a record low in April revived concerns about the health of the US property market, which touched off the financial crisis in 2007 when complex securities tied to mortgages suddenly turned sour.

“The market was hoping for some sign of an easing in the downdraft in this all-important sector of the economy,” said Peter Kenny, managing director of Knight Equity Markets.

“Some good news is that building permits slackened,” he added. “The first step to healing in the housing sector is to eat into inventory.” Indeed, some investors took that glass half-full view, and the fallout in US stock markets was minimal. Major indexes were little changed near midday, while the US dollar slipped against a basket of currencies and prices for US government bonds were a touch lower.

World Bank president Robert Zoellick, speaking on Spanish television, said financial markets were showing signs of recovery and the pace of contraction in global output appeared to be easing.

But he tempered the rising optimism by saying: “It’s not enough to focus on markets. If we don’t look at unused capacity in the global economy, the recovery will be slower.

“The majority expect recovery at the end of this year, at the beginning of next year,” he said.

Still, the US housing data showed that there is a long way to go before the economy is healthy enough to resume normal growth.

Housing starts tumbled 54.2 per cent compared to the same period last year, while new building permits, which give a sense of future construction plans, dropped 3.3 per cent – the worst showing since records began in January 1960. A private survey had shown on Monday that US homebuilding sentiment jumped to its highest level in eight months, helped by the Federal Reserve cutting interest rates to almost zero and the launch of a first-time home buyers’ tax credit.

“What has to turn first is the sales, you have so much inventory out of there. It is going to be sometime late this year that this turns around,” said Kurt Karl, head of economic research and consulting at Swiss Re in New York. “We are still bumping along the bottom, but the bottom is better than going south.”

In Germany, a rise in the ZEW economic institute’s sentiment indicator for May, which forecasts conditions six months ahead, came after a jump in manufacturing orders and exports, reinforcing signs the worst of the slump is over.

“It’s another powerful gain, as we had expected. It’s still part of the ‘it can’t get any worse’ effect,” Ralph Solveen of Commerzbank said.

With the job market still uncertain and unemployment on the rise, consumers are yet to feel the impact of any improving market and analyst sentiment.

Britain’s biggest clothing retailer Marks Spencer posted a 40 per cent slide in full-year profits, but said it was hopeful the downturn in its market had leveled off.

“I’m not into ‘green shoots’ mode, but I am thinking maybe this is a plateau at the bottom,” said executive chairman Stuart Rose.

Speaking at a conference in South Korea, Nobel Prize-winning economist Paul Krugman said the US may emerge from recession in a technical sense as early as this summer, although a likely worsening in labour conditions means a “depressed economy” could last as long as five more years. – (Reuters)