Feb. 23 (Bloomberg) -- Business confidence in Germany, Europe's largest economy, probably rose for a third month in February on evidence it's recovering from a contraction in the fourth quarter, a survey of economists showed.

The Ifo institute's index of business confidence probably rose to 96.7 from 96.4 in January, the median forecast of 42 economists in a Bloomberg survey showed. Ifo, which surveys about 7,000 executives for its monthly report, will publish the index at 10 a.m. in Munich.

Germany's $2.7 trillion economy is showing signs of a recovery after skirting recession in the second half of last year. Factory orders surged the most in more than a decade in December, manufacturing growth accelerated in January and investor confidence rose for a third month in February.

``We believe that the economy bottomed out in November last year and since then we have been seeing signals that things are getting better,'' said Thomas Mayer, chief European economist at Deutsche Bank AG in London. ``It's not a powerful recovery and it's very much stop and go, but, on balance, things are improving.''

Italian business confidence probably also climbed in February, with an index rising to 89.5 from 89.2 in January, according to the median of 22 forecasts in a Bloomberg survey. The Isae institute will release its report at 9:30 a.m. in Rome. Belgian executive confidence may also have gained, a separate survey showed. That report is due at 3 p.m. in Brussels.

Unexpected Contraction

Germany's economy unexpectedly contracted 0.2 percent in the fourth quarter as the highest unemployment since World War II crimped consumer spending, companies cut investment in equipment and exports failed to make up the shortfall. The IW institute last week cut its 2005 growth forecast to 1.5 percent from 2 percent.

Germany is also holding back growth across the dozen-nation euro region, which slowed in the fourth quarter. The Ifo institute said yesterday economic confidence in the region fell this quarter and the European Commission last week cut its first-quarter growth forecast to 0.4 percent from last month's 0.5 percent.

For now, policy makers are relying on domestic spending to pick up after export-led growth nearly ground to a halt at the end of last year. European Central Bank Chief Economist Otmar Issing said on Feb. 15 he expects growth to accelerate from a ``low point'' in the fourth quarter. Economy and Labor Minister Wolfgang Clement said last month tax reductions will shore up consumer spending this year.

Schroeder's Tax Cuts

German Chancellor Gerhard Schroeder cut income taxes by 6.5 billion euros ($8.6 billion) this year, bolstering optimism among some executives that consumer spending, the largest part of the economy, may soon recover from a three-year slump. Metro AG Chief Executive Officer Hans-Joachim Koerber, who heads the world's third-largest retailer, said last month that ``the worst is now behind us.''

``Already in the first quarter, things should pick up again slightly,'' Gernot Nerb, an economist at the Ifo institute, said in an interview yesterday after publishing a report on euro-region business confidence.

Confidence among executives in Germany and across the euro region may also be helped by reports of rising earnings and sales. HeidelbergCement AG, Germany's largest cement maker, said yesterday 2004 sales rose 8.8 percent after expanding in eastern Europe and Asia to compensate for a domestic building slump.

Germany's growth prospects may still be hindered by a slowdown in the global economy. The International Monetary Fund estimates that growth around the world will slow to about 4 percent this year from 5 percent in 2004.

Euro Threat

U.S. consumer confidence fell in February from a six-month high, reflecting a decline in expectations for the world's largest economy for the next half year. Japan's economy slipped into recession in the fourth quarter of 2004.

Exporters may also be hurt by a further appreciation to a euro. While Europe's single currency has declined since touching a record of $1.3666 in December, it jumped on Tuesday after the Bank of Korea said it plans to diversify its reserves. The euro was worth $1.3214 at 3.20 p.m. yesterday.

The currency has surged 21 percent against the dollar in the past two years partly on concern that Asian central banks will lose their appetite for dollar-denominated assets amid a record U.S. current account deficit. South Korea's reserves, which total $200 billion, are the world's fourth biggest.

To contact the reporter on this story: John Fraher in Frankfurt at jfraher@bloomberg.net.

Last Updated: February 22, 2005 19:02 EST