May 25 (Bloomberg) -- Business confidence in Germany, Europe's biggest economy, dropped for the third month in four in May as stagnating consumer spending and higher oil prices threatened to restrain an economic recovery.

The Munich-based Ifo institute said its confidence index, based on a survey of 7,000 executives, declined to 96.1 from 96.3 in April. Economists surveyed by Bloomberg News predicted a reading of 96, according to the median of 38 forecasts.

``The domestic situation is still very fragile and we'll have to wait and see how the impulse from exports translates into demand at home,'' said Ralph Wiechers, chief economist at the VDMA machinery industry association, whose 3,000 members include carmaker DaimlerChrysler AG and steelmaker ThyssenKrupp AG. ``The consumer is the big question mark.''

The biggest increase in exports since the end of 2000 kept Germany's economy growing in the first three months as consumer spending failed to increase for the fourth straight quarter, the government said today. Higher oil prices and health-care costs boosted inflation in some German states to a two-year high this month, adding another deterrent to household demand.

German consumers haven't boosted spending since the first quarter of 2003 as companies including Volkswagen AG and Continental AG cut jobs or shift them abroad, keeping the jobless rate above 10 percent for the past 18 months.

Expectations Rise

Ifo's index measuring the current situation dropped to 94.4 from 94.9, the institute said. The index measuring future expectations rose to 97.8 from 97.7. The drop in the main index was down to a decline in confidence in Eastern Germany, while sentiment in the western states improved ``slightly,'' Ifo said.

The results of May's survey ``speak for a continuation of the moderate economic recovery in Germany in the next few months,'' Ifo President Hans-Werner Sinn said in a statement.

``Higher oil prices ought to have been a negative factor, so the fact that expectations held steady is an encouraging sign for thinking that the euro area economy will continue to show modest growth in the second quarter,'' said Julian Callow, chief European economist at Barclays Capital in London.

Companies including Degussa AG, the world's largest specialty chemical maker, have said rising oil costs are also threatening earnings prospects. Crude oil futures were little changed today after closing at a record of $41.72 a barrel on the New York Mercantile Exchange yesterday.

Commodity Concern

Germany's benchmark DAX 30 stock index fell as much as 1.5 percent today, paced by oil consumers including BASF AG, the world's biggest chemical maker, and drugmaker Bayer AG. The DAX, which has dropped 3.5 percent this year, was down 1.1 percent at 3823.81 points at 10:55 a.m. in Frankfurt.

Finance ministers from the Group of Seven industrialized countries are seeking to foster global growth by calling on the world's largest producers to raise production. OPEC ministers signaled oil prices above $30 a barrel may be here to stay.

``If these high prices are around for a while, it will make people assess future demand more pessimistically,'' said Stephan Rieke, an economist at ING BHF-Bank AG in Frankfurt ``A certain disappointment in the recovery is spreading through the economy.''

Companies including ThyssenKrupp are relying on foreign demand to boost earnings. Exports rose 4.6 percent in the three months to April, gaining for a third quarter as China and the U.S. power a global recovery, the statistics office said today.

No Support

The International Monetary Fund forecasts that the global economy will expand 4.6 percent this year, the fastest pace since 2000. By contrast, the Bundesbank said last week that Germany is showing no signs of a ``self-sustaining'' recovery and the IMF forecasts growth of just 1.6 percent.

Households are failing to support the recovery as the number of Germans out of work climbs. Unemployment rose for a fourth month in April, pushing the jobless rate rose to 10.5 percent and increasing the chance that Chancellor Gerhard Schroeder will lose regional elections later this year.

French shoppers are more optimistic. Household spending rose in the first quarter at the fastest pace in three years as the discounting period lured shoppers, helping the economy expand 0.8 percent from the previous three-month period.

French households also raised spending on manufactured goods by 1.5 percent in April, a report from the statistics office showed today. Economists had forecast an increase of 0.4 percent, according to the median of 24 forecasts.

`Extremely Favorable'

Schroeder can't rely on the European Central Bank to bolster growth by cutting interest rates. Inflation across the euro- region probably accelerated to 2.3 percent in May, above the ECB's 2 percent ceiling and the fastest since March last year, the median of 28 forecasts in a Bloomberg survey showed.

ECB President Jean-Claude Trichet said in Paris yesterday that rates across the euro region are ``extremely favorable'' for economic growth.

``It would be a good policy to keep rates stable for a longer period,'' said Gernot Nerb, the economist in charge of Ifo's business confidence index.

Eurostat, the European Union's Luxembourg-based statistics office, is scheduled to release the inflation report at 11 a.m. on Friday. Inflation in the German states of Hesse, North Rhine- Westphalia, Saxony and Bavaria accelerated at the fastest pace in more than two years in May, their statistics offices said.

To contact the reporter for this story: John Fraher in Frankfurt at jfraher@bloomberg.net.

Last Updated: May 25, 2004 04:57 EDT