German business confidence has improved unexpectedly for the second consecutive month, according to new data released yesterday. Derek Scally reports from Berlin.

The Munich-based Ifo institute said yesterday that its main index rose from 87.6 in May to 88.8 last month, thanks to increased confidence of business managers.

"The business climate index improved in all areas, especially in the retail sector," said Mr Hans-Werner Sinn, president of Ifo.

"Although the world economy still hasn't experienced positive impulses, domestic demand seems to have returned."

"It could be the beginning of a turnaround," said Mr Gernot Nerb, the Ifo's chief economist.

"The June figures were good, so we can rule out a collapse like in the first quarter."

But the optimism was balanced out by pessimism about Germany's medium-term prospects.

Unemployment is likely to rise to 10.8 per cent next year, the Ifo said, placing added pressure on Berlin's already tight public finances. The Ifo cut its gross domestic product growth forecast for this year to zero and also cut its forecast for 2004 to 1.5 percent.

The German government's official forecast is for 0.75 per cent growth this year.

"I hope that things will get moving in the second half of the year," said Mr Wolfgang Clement, the economics and employment minister, yesterday.

He said the ground needed to be prepared for economic growth, referring to structural reforms and increased tax cuts scheduled for next year.

Berlin is planning to introduce two years of tax cuts, worth around €18 billion, next January to stimulate the economy.

Yesterday it emerged that the Finance Ministry is considering plans to use shares in Deutsche Telekom to finance the move.

The German government still has a 31 per cent shareholding in Deutsche Telekom, worth around €17.5 billion. It would deposit some of the shareholding with the government-controlled KfW (Kreditanstalt für Wiederaufbau) bank.