The Munich based Institute for Economic Research’s (Ifo) closely watched business climate index beat analysts’ expectations, rising for the fourth month in a row to 109.6 points in February from 108.3 points in January.

That is the highest level since July 2011 and is a positive sign for the German economy, the biggest in the European Union.

Analysts polled by Dow Jones Newswires had been pencilling in a much more modest increase to 108.8 points.

“More companies reported a favourable business situation than in January,” said Ifo president Hans-Werner Sinn.

“They expressed greater optimism about their business expectations for the fourth time in succession. The German economy is currently supported by domestic demand,” Sinn said.

Ifo calculates its headline index on the basis of companies’ assessments of their current business and the outlook for the next six months.

While the sub-index, measuring current business, rose to 117.5 points in February from 116.3 points in January, the outlook sub-index rose to 102.3 points, also its highest level since July 2011.

Official growth data published last week showed that the eurozone debt crisis caused the German economy to contract at the end of last year for the first time since the 2009 recession.

And a raft of earnings data published by some of the country’s biggest companies on Thursday, including insurance giant Allianz, telecoms behemoth Deutsche Telekom and the country’s second-biggest lender Commerzbank, showed that no sector appears to be completely immune to the debilitating debt crisis.

But analysts are convinced that the dip in activity will prove only temporary.

“Did anyone say recession? The Ifo data provide further evidence that the economic contraction at the end of last year was only a brief stopover,” said ING Belgium economist Carsten Brzeski.

“It looks as almost nothing can shatter German business optimism. Solid economic fundamentals, recent indicators and – despite all long-term worries – this week’s Greek deal bode well for at least a stabilisation of the German economy,” the analyst said.

Christian Schulz, senior economist at Berenberg Bank, said “the economic clock shows Germany back in boom territory.”

Another confidence barometer, the purchasing managers’ index, had been weaker this month.

But the Ifo index, “which is usually a better indicator of economic growth in Germany, extends the run of positive leading signals,” Schulz said.

He cautioned that harsh winter in January and February could still lead to a contraction of GDP on the back of weaker construction investment, effectively putting Germany in a so-called “technical recession”, which is defined as two consecutive quarters of negative growth.

But any such contraction “should remain mild,” Schulz insisted.

Ben May at Capital Economics in London was more cautious, warning that even if Germany does avoid a recession, “2012 still looks set to be a tough year.”

“This year will be a challenging one for exporters,” traditionally the driving force of German growth, he argued.

Concluding that experts “continue to think that the economy will probably stagnate this year and that worse may be to come in 2013.”

AFP/jcw