German industrial production rose for the second consecutive month in February, signaling hope that Europe’s largest economy might soon recover from a likely shallow recession experienced in the past six months.

The 2.1% increase, driven by construction, surpassed the expectations of economists surveyed by Bloomberg.

Despite this improvement, overall production remains below pre-pandemic levels, highlighting the challenges faced by Germany’s vital manufacturing sector, including increased energy costs following the conflict in Ukraine, weak foreign demand, high borrowing costs, and policy uncertainty.

Carsten Brzeski, global head of macro at ING, suggested that the data indicates the end of stagnation in the first quarter, offering grounds for cautious optimism.

Recent economic indicators have been mixed, with factory orders showing a slight increase due to volatile large items, while business surveys suggest deteriorating industry momentum in March, Bloomberg reported.

However, business confidence as measured by the Ifo institute and ZEW investor expectations improved in the past month, driven by expectations of interest-rate cuts by the European Central Bank starting in June and improving global conditions.

Economists surveyed by Bloomberg anticipate a 0.1% contraction in the German economy for the first quarter, following a 0.3% decline in the previous quarter, though a new model by Bloomberg Economics suggests a less severe outcome, with the likelihood of recession slightly above 30%.

Written by B.C. Begley