German business sentiment unexpectedly improved in November for the first time since April as firms took a more upbeat view about their current situation and shrugged off concerns about the strong euro.
The Ifo economic think tank said its business climate index, based on a monthly poll of some 7,000 firms, rose to 104.2 from 103.9 in October. A Reuters poll of 44 analysts had pointed to a fall to 103.3, with all those surveyed expecting a fall.
"It is significant that sentiment is so good given financial market developments, the rise in oil prices and the surge in the euro," said Commerzbank economist Matthias Rubisch.
"We still have a scenario of a weaker economy, but there are no reasons to worry about a recession," he added.
Munich-based Ifo said the survey results showed Europe's largest economy was cooling gradually. The institute's business climate for the manufacturing sector rose.
"With regard to future exports, optimism has strengthened despite the rising euro exchange rate," Ifo said in a statement.
The German economy enjoyed a strong contribution from foreign trade last year, when it grew by 2.9 percent -- its fastest in six years. Many economists had feared the strong euro would crimp foreign trade and the economy could then languish.
Ifo economist Hans Guenter Russ told Reuters the stronger euro had not been as harmful as many had expected.
The euro and stocks pared losses and Bund futures pared gains after the surprise rise in the headline Ifo index.
The euro touched a record high of $1.4966 late last week according to Reuters data and policymakers have expressed concern it could hurt exports.
Some German firms say the strong euro is hurting their business but others have played down the impact. Premium carmaker BMW has said the impact from the strong euro would be less this year than in 2006.
Finance Minister Peer Steinbrueck told the Handelsblatt business daily the German economy had done well in absorbing the rise of the euro in the past months, but added: "It will become, of course, increasingly difficult for key export sectors."
Ifo's Russ played down the impact of the strong currency, telling Reuters: "The euro is not as dangerous for companies as is often assumed."
A separate Ifo gauge of current conditions rose in November to 110.4 from 109.6 the previous month. The survey's expectations component dipped to 98.3 from 98.6 in October.
The business climate improved in manufacturing and wholesaling but deteriorated in the construction industry and in retailing, Ifo said.
The retail sector has struggled to grow despite a steady fall in unemployment, as Germans save rather than spend money.
Germans' savings rate rose to its highest since the mid-1990s in the first half of this year as households worried about the impact of welfare reforms.
German economic growth rebounded in the third quarter, but economists say the pace of expansion is probably slowing.
"We cannot expect the solid growth of the third quarter to hold through the New Year. But the economy will likely continue to grow -- stagnation or a recession are not in sight," said Alexander Koch at UniCredit.