BERLIN German analyst and investor sentiment leapt to its highest level in 10 months in February, reinforcing signs that Europe's largest economy is returning to growth as the rest of the euro zone faces a mild recession.
The ZEW think tank's monthly poll of economic sentiment jumped for the third month in a row, to its highest level since April 2011, smashing expectations and sending the euro to a session high against the dollar.
This contrasted starkly with other European data showing output at factories in the euro zone tumbled in December and Portugal's recession deepened in the last quarter of 2011.
A Reuters poll showed the euro zone economy shrinking 0.4 percent in 2012, returning to growth in 2013 with a 1.0 percent expansion.
But Germany may be the trailblazer.
"Germany is leaving the winter slump earlier than rest of euro zone," said Christian Schulz of Berenberg Bank. "Germany fundamentally has a high level of competitiveness."
"The economy only contracted because euro zone crisis derailed whole European continent and beyond."
Mannheim-based ZEW said its sentiment index rose to 5.4 from -21.6 in January. This was the first time the index turned positive since May, and compared with a consensus forecast in a Reuters poll of analysts for a gain to -12.0.
Germany's export-driven economy recovered quickly from the 2008/09 financial crisis, outpacing peers, but it began to feel the pinch late last year due to a global slowdown and uncertainty over the euro zone debt crisis.
Official data due on Wednesday is expected to show the economy contracted 0.3 percent in the fourth quarter of 2011.
Germany faces a period of weak growth with "significant downside risks to activity," the Organisation for Economic Co-operation and Development said in a report on Tuesday.
"Germany needs to go beyond successful crisis management and address the long-term underpinnings of growth," the Paris-based organisation said, sticking to its forecast for 2012 economic growth of just 0.6 percent.
However, forward-looking surveys show that the economy will likely avoid a recession and pick up again at the beginning of 2012 on the back of a stabilizing global economy and optimism over the euro zone sovereign debt crisis.
"The recent slowdown in economic growth isn't likely to last in the view of the surveyed financial market experts," said ZEW president Wolfgang Franz in Mannheim. "There is a good chance that the German economy will experience a slight uplift in the second half of 2012."
EUROPE FACES RECESSION
The upbeat forward-looking ZEW survey contrasted with other data released on Tuesday, suggesting Europe is mired in a mild recession which will drag on the global economy.
Euro zone industrial production fell 1.1 percent in December from November, partly due to a sharp drop in German output, as the euro zone debt crisis damaged morale among shoppers and businesses alike.
"December's euro-zone industrial production data add to evidence that the economy shrunk pretty sharply in the fourth quarter," said Ben May of Capital Economics, noting he expected Wednesday's data to show the euro zone economy contracted by 0.5 percent in the fourth quarter.
Preliminary data on the euro zone's gross domestic product in the fourth quarter will be released on Wednesday and is expected to show a 0.3 percent contraction.
Belgium, Portugal and Greece are already in recession and the rest of euro zone is expected to struggle through a mild recession this year, although Germany may now avoid it altogether after a slight contraction in the fourth quarter.
Other data on Tuesday showed that the recessions in Portugal and Greece deepened in the fourth quarter of 2011. Greece's economy shrank at an annual 7 percent rate in the last quarter.
Underlining Europe's weak economic outlook, rating agency Moody's warned it may cut the triple-A ratings of France, Britain and Austria and it downgraded six other European nations including Italy, Spain and Portugal.
Economists said the pickup in the German economy might stimulate growth elsewhere in Europe, but not much.
"We doubt that growth <in Germany> will be strong enough to prompt an economic recovery in the region as a whole," May said.
The OECD noted that Germany accounted for under 3 percent of GDP in France, Spain and Italy, and its import propensity was rather small.
Increased domestic demand would thus likely do little to boost export from European partners which often complain weak German spending is causing euro zone imbalances.
"A rise in domestic demand is unlikely to translate into much growth support for other countries," it said.
(Reporting By Sakari Suoninen and Eva Kuehnen in Mannheim, Andrei Khalip in Lisbon, Andy Bruce in London and Brian Rohan in Berlin; Writing by Sarah Marsh. Editing by Jeremy Gaunt.)