GERMANY MAY not be heading for recession after all, as data released yesterday suggested cheaper oil and a weakening euro are making life easier for exporters in Europe's largest economy.

The Centre for Economic Research (ZEW) index of investor sentiment, one of Germany's most closely watched economic indicators, rose more than expected in August, indicating investors believe they will weather the economic times better than their European neighbours.

"The improvement . . . signals that fears among financial market experts about an economic downturn are contained," said Mannheim-based ZEW in a statement. The 300 analysts and institutional investors it surveyed cited oil price falls and a weakening euro as reasons for optimism.

A stronger dollar makes high-end German exports like cars and machinery more attractive to potential buyers outside the euro zone.

"Market experts have not been particularly taken aback by the negative growth rate of the second quarter," said the ZEW. "They expect weaker but, all in all, solid economic conditions and do not fear a recession."

Yesterday's news has gone some way to dispelling the gloom of last week when official data showed the German economy contracted by 0.5 per cent in the second quarter, the first fall in four years. Pessimism-prone German analysts combined that with record inflation of 3.3 per cent and began predicting a recession. But the ZEW defied predictions, announcing its economic sentiment index rose 8.4 points in August to -55.5 points, up from a record low the previous month.

Still, it wasn't all good news yesterday: the federal government announced an 8.9 per cent increase in producer price inflation in July, a 27-year high, caused by surges in prices for natural gas, oil and electricity.

German exporters said yesterday they were noticing a slow-down that would pull growth to below 1 per cent from 1.7 per cent this year.

Exports remain crucial for the health of the German economy and, with Germany producing one-third of total euro zone output, have a direct knock-on effect on the region. So far, Germany, with its low rates of home ownership and credit-shy culture, has avoided the worst of the credit crunch.