Germany's closely watched ifo Business Climate Index increased to 84.9 points in May from 84.5 in April, according to data released on Friday.
The ifo Business Climate Index is a highly regarded early indicator of economic developments in Germany, published on a monthly basis by the Munich-based ifo Institute for Economic Research.
Economists had expected sentiment to weaken slightly as higher energy prices and geopolitical uncertainty continue to weigh on Europe's industrial sector.
The May survey, based on responses from around 9,000 companies, showed that firms were more optimistic about both their current situation and future prospects across manufacturing, services, and trade. But confidence fell slightly among construction companies.
"The German economy is stabilising for the time being, although the situation remains fragile," ifo president Clemens Fuest said in a statement accompanying the survey.
Increased government spending plans on defence and infrastructure could be helping to offset some of the economic strain. Germany has been seeking to revive growth after a prolonged period of industrial weakness and sluggish domestic demand.
Despite the modest improvement, overall business confidence remains weak by historical standards and close to levels seen at the end of 2024.
Concerns over shipping through the Strait of Hormuz, a key route for global oil and gas supplies, pushed up energy costs and added pressure on Germany's manufacturing sector, which remains heavily dependent on industrial energy consumption.
Jens-Oliver Niklasch, an analyst at the German bank LBBW, described the figures as a "small positive surprise". Niklasch said many firms still had solid order books, which could support activity if external pressures begin to ease.
Exports help Germany avoid renewed contraction
Germany's Federal Statistical Office also confirmed that the economy grew by 0.3% in the first quarter compared with the previous three months, in line with preliminary estimates. The expansion was supported mainly by stronger exports.
The figures added to signs that the German economy may be stabilising after narrowly avoiding recession in recent quarters.
However, economists continue to warn that geopolitical tensions, volatile energy markets, and weak global demand could still undermine growth later in the year.
While the latest business survey points to improving resilience among German firms, analysts said the broader outlook remains highly sensitive to developments in the Middle East and energy markets.
