Second-half recovery will be a relief for Chancellor Schroeder

The latest monthly survey by the well-respected Ifo institute set the business expectations index for West Germany at 102.1, up from 100.2 the previous month.

Any figure above 100 in the 7,000-firm survey indicates expectations of expansion.

The business climate index, the most closely-watched segment, rose to 90.8 from 89.3, in line with expectations.

"The new survey data underline the Ifo forecast for an economic recovery in the second half of the year," Ifo President Hans-Werner Sinn said in a statement.

Relief

Economists were expecting August to produce further improvement, after the last set of figures for July showed the third monthly rise in a row.

Even so, the Ifo will come as welcome news for the German government, following the recession into which the country slid in the first half of the year.

But some observers remained cautious about prospects for Germany, given last year's growth of a paltry 0.2%.

"The expectations component was very high and would signal exuberant growth in the fourth quarter, but looking at the current conditions component, I personally don't believe that will materialise," said Andreas Rees at Hypovereinsbank.

"I'm concerned about the difference between expectations and current conditions which seems to be widening and shows that expectations are becoming further removed from what's really happening."

East-West contrast

Most of the rest of the Ifo survey was also positive with the current business conditions index for West Germany rising to 79.9 from 78.7 - although it remains close to 10-year lows.

The current conditions are viewed as more positive in the former Eastern Germany than in the West.

Eastern Germans face a tougher time than their Western counterparts, not least because unemployment is much higher as old East German businesses have been shut down faster than those elsewhere.

In Eastern Germany, the business climate index rose in August, remaining above 100, while the current conditions index was a solid 123.3, also a rise on July.