In their June business climate index, the Munich-based economic analysts found that business sentiment in Europe's biggest economy ticked up to 101.8 points from 101.5 points in May. This was the best result since May 2008.
The survey of 7,000 corporate leaders appeared to show optimism about the effect of austerity measures on growth prospects. German Chancellor Angela Merkel recently unveiled an austerity plan which foresees more than €80 billion in spending cuts between next year and 2014.
The confidence measure was better than the 101.0 points predicted by analysts polled by Dow Jones Newswires.
A separate measure of business expectations in the six months to come showed that executives were slightly more reserved, with the index slipping slightly to 102.4 points, compared with a forecast of 102.8 points.
"Companies see business development in the next half-year slightly less optimistically, for the second month in a row," Ifo president Hans-Werner Sinn said in a statement.
"Nevertheless, companies continue to be confident. The economic recovery is continuing."
He said that exports, the German economy's chief growth motor, are not expected to maintain their recent rate of increase, particularly in the manufacturing sector.
And retail consumers, the chief Achilles' heel of the German economy, remain the most wary about the future.
Critics in Germany and abroad have warned the belt-tightening could stifle economic growth.