German business morale surged at its fastest pace in over two years in February, pushing higher for a fourth consecutive month and pointing to a solid recovery in Europe's largest economy after a dismal end to 2012.
The Munich-based Ifo think tank said on Friday its business climate index, based on a monthly survey of some 7,000 firms, rose to 107.4 in February, up from a revised 104.3 in January.
That was the biggest one-month rise since July 2010, with the euro and European shares rising after the data, while German bond futures fell.
Germany's economy shrank by 0.6% in the fourth quarter, succumbing to a sharp fall in demand from its euro zone trading partners, but economists expect the gloom to be short-lived and do not see Germany slipping into a recession, defined as two quarters of contraction.
Ifo itself expects gross domestic product (GDP) growth of 0.2% quarter-on-quarter in the first three months of the year.
Ifo's subindex on current conditions rose to 110.2 from 108.1 in January, while a gauge of expectations shot up to 104.6 from 100.6.
Ifo economist Klaus Wohlrabe said he expected exports, the traditional backbone of the economy, would regain momentum and noted that the investment backlog was beginning to clear.
Data released earlier on Friday showed that a plunge in exports drove the strong contraction in fourth quarter GDP, offsetting support from domestic demand and inventories.
The 0.6% GDP fall was the biggest since the economy shrank by 4.1% at the start of 2009, in the wake of the Lehman Brothers bankruptcy, and it was only the second contraction since the 2008/09 recession.
Foreign trade deducted 0.8 percentage points from GDP while domestic demand added 0.2 percentage points.
Friday's breakdown of GDP data showed exports dropped by 2.0% in the fourth quarter while imports fell by 0.6%, boding ill for struggling euro zone states which had hoped to offload more of their goods on Germany, where rising wages, high employment and moderate inflation have boosted domestic demand.
Private consumption rose by 0.1% on the quarter and public consumption was up by 0.4%.
Investment in equipment has been falling for more than a year now and dropped by 2.0% in the fourth quarter as firms spent less on machines, tools and vehicles, the Statistics Office said.
Many German companies are cutting costs, with steelmaker ThyssenKrupp recently saying it wants to cut 500 mln euros in costs over the next three years at its European steel operations.
Germany's economy nonetheless remains in good shape compared to struggling euro zone peers like Greece and Italy, where GDP shrank by 6.0% and 0.9%, respectively, in the fourth quarter.
Germany grew by a post-reunification record of 4.2% in 2010 and by some 3% in 2011 but growth slowed to 0.7% last year as exports suffered due to sagging demand in the euro zone and firms cutting back on investments.
