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Like many German companies, Glashütte Döbern, a maker of fine crystal glassware, has had a tough couple of years. Following the 9/11 terror attacks, orders slumped from the United States, its largest market. But business is finally starting to sparkle again at this 35-year-old company, which employs 130 people at its factory in the eastern German state of Brandenburg. Orders are up not only domestically and from the U.S., but also from France, Spain, Britain — even China. Instead of closing for its annual vacation in July and August, the company went on three shifts to keep up with the influx of new business. "We see the light at the end of the tunnel," says a relieved Frank Mader, co-owner and president, surveying the company's prospects. "It's looking better than even five months ago. The world economy is picking up again."

After three years of stagnation, Germany is finally taking its first tentative baby steps toward economic recovery. So far, there are few definitive statistics to support the notion that the entire economy is growing again. But the vignettes feel like they're attaining a critical mass. METRO Group, the country's largest retailer, for example, forecasts sales will rise 5.5% this year. Porsche sold 60% more sports cars in Western Europe in July than it did a year ago. BMW added 2,100 jobs at German factories to meet an expected increase in production. And an August opinion poll by NFO Infratest showed that Germans were optimistic about the future of the economy for the first time since last September.

Consumption is also beginning to inch up. GfK, a firm that tracks consumer trends, said its index of consumption rose from 4.2 in July to 4.5 in August, signalling that Germans are expected to spend more. "The digital sector is booming," says Marcus Neuhaus, manager of a ProMarkt electronics and appliance chain store on Berlin's trendy Kurfürstendamm. According to Neuhaus, sales of high-end TVs costing between €4,000 and €7,000 are up 15-20% this year. Digital cameras, laptops and even €800 espresso machines are selling fast. "Price is a secondary consideration," Neuhaus says. "People want the latest technology."

While the DAX stock index has shot up 60% from a seven-year low in March, two leading indicators are also pointing to an upswing in the second half of the year. The ZEW Center for European Economic Research reported that its survey of financial analysts and institutional investors had risen for the eighth straight month in August. And the widely watched Ifo index of business confidence in Western Germany rose from 89.2 in July to 90.8 in August, its fourth consecutive rise. The Munich-based economic institute surveys 7,000 executives each month about production, orders and inventories. "We've turned the corner," says Gernot Nerb, an economist at Ifo. "We're in the early phase of the upturn."

Germans are breathing a little easier, if not bubbling with optimism. "The big catastrophe — the fall into deflation — just did not happen," says Holger Schmieding, European economist for Bank of America. "It's more catastrophe avoided than a big upswing ahead." It would be foolish to assume that everything is suddenly fine. After all, the economy was in recession through the first half of 2003, and unemployment rose by 305,000 over the past year, bringing the jobless total to 10.4%. "What kind of upswing is it when you have increasing unemployment?" asks Ullrich Heilemann, vice president of the Rhine-Westphalia Institute for Economic Research (RWI). "The bad days may be gone but we're not in heaven yet."

How do economists explain the incipient turnaround? The euro has weakened from its recent highs against the dollar, aiding big exporters like steelmaker ThyssenKrupp and electronics giant Siemens. The U.S. economy is picking up, boosting demand for imports from Europe. Interest rates are the lowest in a half-century, helping businesses finance investment. And there's even some credit due to Chancellor Gerhard Schröder — a leader who has seen precious little of that recently. Schröder's government brought forward a planned €15.5 billion tax cut from 2005 to January 2004; economists expect it will create a "wealth effect" that many assume will stimulate the economy. RWI is forecasting 1.8% economic growth in 2004, with about a third of that increase due to the tax cut. In contrast, this year's gdp is expected to decline by 0.2%.

Although he has often teetered, Schröder seems determined to force the unemployed to actively seek jobs. Beginning next year, those who refuse a job, no matter how menial or poorly paid, will have their benefits cut by a sliding scale depending on age for up to three months. And it might work. Chris Rennart, an unemployed 18-year-old who left school two years ago, says demand is ratcheting up to get work. "There's a lot of pressure to find a job," he says. "What will people do — sleep in the street?" Kevin Mantik, 22, an unemployed carpenter in Berlin, says the government is pressing him to move to the western city of Dortmund because there is a job there for him. "I will go but I'll have to leave my family and friends behind," Mantik says. If he doesn't go, he'll lose all his jobless benefits.

Most of Schröder's proposed reforms still haven't been submitted to parliament and passage is expected later this year. Some proposals, such as one to cut employers' contributions for health insurance, have already been approved by the opposition Christian Democrats, while others, such as the tax cut, face an uphill struggle to win passage.

Schröder's work carrots are as innovative as his sticks. One reform, called "mini-jobs," allows people to work part-time for up to j400 a month without having to pay tax or social insurance. The employer pays a flat 25% fee to the government. Since April, an astounding 930,000 people have started mini-jobs (most are second jobs). "It's really fantastic," says Anke Koch, 35, who works in an upscale Berlin restaurant. "I can work part-time and get health benefits for me and my baby. And I've got money in my pocket." Another reform helps the unemployed start businesses. Called "Ich AG" (Me Inc.), the government pays unemployed workers j600 a month to help set them up in business. So far, 43,000 people have started new businesses under the program.

Some economists thought things were turning around last year, only to be proved wrong. And skeptics point out that a third of next year's expected growth will come from the mundane fact that five holidays will fall on weekends in 2004, meaning Germany will have more work days than this year. But what's clear is that consumers in Germany and elsewhere are leading this recovery, not the traditional manufacturing industries. That's good news for managers like Frank Mader, of Glashütte Döbern, whose fate is in the hands of shoppers from Paris to Beijing.

• CHARLES P. WALLACE | Berlin
• The German economy shows signs of improvement. But the jobless aren't buying it