BERLIN (AP) -- German business confidence has increased more than expected this month as hopes rise that Europe's largest economy will quickly put behind it a weak patch and benefit from an easing in the continent's financial turmoil, a closely watched survey showed Friday.
The Ifo institute's confidence index, a key indicator of where the German economy is headed, rose to 104.2 points in January from 102.4 in December.
The third consecutive increase lifted the index to its highest level since last June and was better than the reading of 103 points economists had predicted. Managers' view of their current situation improved somewhat and the outlook for the next half-year improved significantly.
In particular, Ifo said in a statement, "optimism is returning" in the important manufacturing sector. "The German economy made a promising start to the new year."
The German economy grew a modest 0.7 percent last year, and officials estimate it shrank by as much as 0.5 percent in the fourth quarter compared with the previous three-month period.
But the country's central bank, the Bundesbank, said earlier this week that it is already showing signs of picking up as improving export hopes combine with a healthy, stable labor market to brighten the picture.
"The contraction in the fourth quarter of 2012 seems to be short-lived," with fears of a eurozone breakup receding and prospects improving for the U.S. and China, said Carsten Brzeski, an economist at ING in Brussels.
Timo Klein, an economist at IHS Global Insight in Frankfurt, said that "the dampening impact from the troubled economies in southern Europe remains a restraining factor but will not prevent a strengthening tendency of the German economy."
The latest Ifo reading indicates that, after the fourth-quarter contraction, the economy already has rebounded in the current quarter, Klein said. First-quarter growth would prevent Germany following several other eurozone countries into recession.
Ifo's survey is based on responses from about 7,000 companies in various business sectors. Earlier this week, a separate survey of investor confidence showed a much sharper than expected rise.