German business morale rose unexpectedly in February, a survey showed on Monday, easing recession fears in Europe's largest economy and reflecting a slight improvement in its manufacturing sector, which has been struggling with falling exports.
The Ifo institute said its business climate index rose to 96.1 from an upwardly revised 96.0 in January. The February reading compared with a Reuters consensus forecast for a fall to 95.3.
"The German economy seems unaffected by developments surrounding the virus," Ifo President Clemens Fuest said in a statement, sticking to a first-quarter growth forecast of 0.2 percent.
Ifo, however, warned that the survey did not fully reflect the possible economic fallout from the virus, which could hurt growth if it becomes a pandemic. The virus has killed nearly 2,500 people in China, slamming the brakes on the world's second-largest economy and spreading to about 29 countries and territories worldwide.
The German economy stagnated in the fourth quarter of 2019 due to weaker private consumption and state spending, renewing fears of a recession.
"The virus epidemic in China is a possible danger for the German economy that isn't easy to gauge at the moment," said Ifo economist Klaus Wohlrabe. "Should it become a pandemic, Germany as an export nation would be particularly affected."
Europe's biggest economy has been losing momentum as its manufacturers linger in a recession prompted by a reduction in exports while its automotive sector faces disruption from a costly move to electrification.
Ifo said a sub-index measuring morale in the manufacturing sector rose for the third month in a row on a better orders outlook, offering hope that the downturn was bottoming out.
"The small rebound in February will be a relief for those braced for a big hit from the virus, but it leaves the index below its level in December and is still consistent with the economy not growing at all in the first quarter," said Andrew Kenningham of Capital Economics.
Official figures released earlier this month show German industrial output suffered its biggest fall in December since the recession-hit year of 2009, a shock drop highlighting the weakness in manufacturing.