German business confidence rose in July for the second month in a row, making an economic recovery more likely, the country's Ifo research institute said.
Manufacturers are more optimistic about the future
A weaker euro boosted optimism among exporters, the monthly Ifo survey of 7,000 firms suggested.
Its main business climate index rose to 95.0 in July from 93.3 in June, hitting its highest level since February.
Germany is facing a September general election in which economic anxieties are expected to play a major role.
Chancellor Gerhard Schroeder triggered the general election after his Social Democrat party lost a key regional election, largely due to fears over Germany's poor economic performance.
Unemployment reached 5 million - its highest level since the 1930s - earlier this year, and business confidence remained weak in the first half of 2005. June's Ifo reading showed the first improvement in five months.
The latest July reading beat economists' forecasts. The consensus was for a reading of 94, according to Reuters.
"An economic recovery has become more likely," said Ifo President Hans-Werner Sinn.
"In manufacturing and wholesaling the improvement of the economic climate was above the survey average, especially because of the clearly improved business expectations," Ifo said.
However, it added: "The rise in export expectations in manufacturing was less marked."
In construction, expectations "brightened slightly". The only exception to the brighter picture was in retailing, where business expectations fell, possibly due to worries over sales tax increases.
Eastern Germany continued to lag behind the rest of the country as the business climate improved less there, Ifo said.
Better global outlook
The improvement in the overall picture was "stronger than expected" said Citigroup economist Juergen Michels.
"Quite a large improvement for the manufacturing industry reflects the weaker euro and a more upbeat view on global demand," he said.
Ifo's index of confidence in prospects for the next six months improved to 95.0 from 92.9.
Germany's economic growth is sluggish - six economic institutes halved their full-year forecasts to 0.7% in April.
The news had little impact on Frankfurt stock exchange. The Dax index of blue-chip shares rose slightly shortly after the report's release, before falling back again.