German business confidence unexpectedly dipped in February as hope that weak domestic demand in Europe's largest economy was strengthening remained unfulfilled for another month.
The Munich-based Ifo institute said on Wednesday its gauge of business confidence dipped to 95.5 from 96.4 in January, worse than the most pessimistic forecast, as the current outlook in both the manufacturing and retail sectors worsened.
It was the Ifo index's first fall since November. Forecasts for the index, which is based on a monthly poll of some 7,000 firms, ranged between 96.1 and 97.5.
"We're surprised that the Ifo index has taken such a knock," said DZ bank economist Mr Bernd Weidensteiner.
"The main reason is probably that the domestic economy is still weak, particularly in the retail trade."
Ifo President Hans-Werner Sinn said in a statement that a pick-up in German domestic demand was still sluggish and that firms' business outlook for the next six months had got worse.
"In manufacturing and retailing the business climate index declined due to weaker assessments of the current situation," Mr Sinn said.
"A slight improvement was only reported for the export expectations in manufacturing."
Economists said that with unemployment reaching record highs in the postwar era, consumers were likely to remain reluctant to part with cash.
Lehman Brothers' economist Ms Phyllis Papadavid said the decline in the Ifo index's expectations component to 96.4 was particularly disappointing after the strong rise in the ZEW institute's gauge of investor confidence earlier this month.
"The fact that both current conditions and expectations have dropped is of particular note. We were expecting a rise in expectations, given the bump up in the ZEW," she said.
A separate measure of current business conditions also fell, dipping to 94.5 after reaching 95.3 in January.
"The drop in the survey will be some source of concern for the ECB. They tend to look at all indicators as a whole, but it follows on from weak Q4 GDP reports," Ms Papadavid added.