(Bloomberg) -- Investor confidence in Germany’s economic outlook jumped to the highest in more than two years, driven by expectations that the European Central Bank is ready to cut interest rates in the coming months.

An expectations gauge by the ZEW institute rose to 31.7 in March from 19.9 the previous month — more than predicted by a single economist in a Bloomberg survey. A measure of current conditions also improved. 

“Economic expectations for Germany are significantly improving,” ZEW President Achim Wambach said in a statement. “At the same time, more than 80% of those surveyed anticipate that the ECB will cut interest rates in the next six months.” 

Europe’s biggest economy is probably in the midst of a recession as analysts predict a second consecutive quarterly contraction in the first three months of the year. The Bundesbank has insisted however that a severe downturn isn’t likely. 

The country’s important manufacturing sector has been its biggest weak spot in recent months, with soft global demand and high interest rates weighing on activity. But slowing inflation and rising household incomes have raised hopes that consumers will drive a recovery during the rest of the year. 

The ECB is meanwhile expected to ease the burden on companies and consumers by lowering borrowing costs soon. President Christine Lagarde gave the clearest signal of such a move after this month’s policy meeting and officials are converging around June as the most likely starting point for several reductions in borrowing costs this year. 

While the German economy now faces a “decent outlook,” the sharp contraction at the end of last year is creating a “statistical hangover” that means it may stagnate at best over the whole of 2024, Deutsche Bank economists Robin Winkler and Marc Schattenberg said in a note on Monday. 

--With assistance from Joel Rinneby and Kristian Siedenburg.

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