Analysts blamed an unusually harsh winter for the decline in the closely watched Ifo index, which fell to 95.2 points in February from 95.8 in January.
The result wrong-footed analysts surveyed by Dow Jones Newswires who had anticipated a record 11th straight rise and the disappointing data knocked the euro on the foreign exchange markets.
The survey of around 7,000 firms in the key manufacturing, construction, wholesaling and retail sectors is seen as a guide to future economic performance.
“For the first time in ten months, the business climate index has not risen,” said Hans-Werner Sinn, the institute’s president, noting that a sour climate in retailing was responsible for the drop. “The economic recovery is expected to continue when winter is over.”
“Jack Frost caused sizeable disruptions in construction and also retail,” Alexander Koch from Unicredit bank said.
“In addition to the closure of building sites, consumers apparently preferred to enjoy the snow and the sun in the mountains or made themselves comfortable in front of the fire, instead of heading for shopping centres.”
Germany shivered through the coldest January since 1987, with deep snow on the ground in the vast majority of the country, slowing construction and consumption.
Carsten Brzeski, senior economist at ING, also blamed the unusually harsh winter and warned: “The bumpy ride is not over yet.”
Nevertheless, he said: “Looking ahead, the underlying trend of the German recovery remains healthy: demand for German products remains strong and German companies are increasingly becoming more positive.”
The German economy is recovering gingerly after suffering its worst recession since World War II, with output slumping by five percent last year. Despite predictions of a solid return to growth in 2010 – the government projects output of around 1.4 percent – the economy stagnated in the fourth quarter of 2009, the last figures available.
The German economy is heavily dependent on exports and has suffered more than most as the financial crisis took its toll on global trade.
In this sense, Koch said the Greek debt crisis, which has shaken confidence in the euro, could even help Germany, as a weaker euro encourages exports.
“The Greek debt problem so far didn’t impair business sentiment. The corresponding depreciation in the euro exchange rate even provides further support to the export sector,” he said.
But not everyone took such a positive view.
Jörg Krämer, the chief economist at Commerzbank, predicted the Ifo would now continue to fall in the months ahead after snapping its record winning streak.
“This fits with our prediction that the German economy is set to grow at a slower pace,” he said.
For her part, Elga Bartsch from Morgan Stanley said: “The unexpected decline underscores our call for a bumpy, below-par and brittle recovery this year.”