BERLIN (Reuters) - German business morale and investor sentiment probably improved in January while the services sector expanded, data is set to show next week, lifting some of the gloom hanging over Europe's largest economy.
After holding up relatively well during the first two years of the euro zone crisis, Europe's economic powerhouse took a knock last year, leading to a contraction in output in the final quarter.
That marked its worst quarterly performance in nearly three years as traditionally strong exports and investment slowed and the German government last week cut its forecast for economic growth this year to 0.4 percent from 1.0 percent.
Nonetheless, most economists see Europe's paymaster avoiding a recession - defined as two consecutive quarters of contraction. Expected rises in the Ifo business climate index and ZEW investor sentiment index next week, albeit from relatively low levels, are seen bolstering those hopes.
The Ifo index, a key barometer of the state of the German economy, is seen edging up for a third straight month to 103.0 in January from 102.4 last month, according to the mid-range forecast in a Reuters poll of 40 economists.
"There will probably be another small rise in the Ifo survey which will provide some hope that, after what looks likely to have been a very weak end to 2012, economic conditions might have improved a bit at the start of this year," said Jennifer McKeown, senior European economist at Capital Economics.
"That said, the level of the Ifo survey as well as the ZEW index is very low, so it's certainly not the case that the German economy is recovering strongly."
That tallies with recent statements from German companies. Deutsche Post's (DPWGn.DE) chief financial officer said 2013 would "not be easy", while Air Berlin (AB1.DE) announced it was cutting 10 percent of its workforce and Continental (CONG.DE), Germany's biggest tyre maker, forecast slower growth this year.
Economists expect the current conditions component of the Ifo index to tick up to 107.2 in January, from 107.1 the previous month, and see the expectations component rising to 99.0 from 97.9, a Reuters poll showed.
"It's good for companies that the fiscal cliff in the U.S. has, at least temporarily, been averted and, in addition, recent economic data, especially from China, has been better than expected," Helaba bank said in its weekly outlook.
German analyst and investor sentiment is also expected to have improved, with the ZEW index seen rising for a third consecutive month to 12.0 in January, from 6.9 last month.
"The index probably moved further away from the zero line in January. Evidence for this lies in the trend towards calmer movements on the financial markets and the Sentix index, which also surveys investors and which rose again in January," said Thilo Heidrich, economist at Postbank.
The latest Sentix index showed euro zone sentiment improving for a fifth straight month in January, with investors' expectations rising to their highest level in almost two years after a successful Greek bond buyback and a dip in Spanish jobless figures.
In another positive sign, Germany's services sector is seen expanding in January, with Markit's flash purchasing managers index (PMI) expected to hold steady at 52.0, above the 50 mark that separates growth from contraction.
The manufacturing sector, however, is expected to shrink, albeit at a slower pace than in December. The flash manufacturing PMI index is seen remaining in contraction territory at 46.8, only slightly above last month's 46.0.
That will add to the gloom in German industry, which saw orders drop in November as demand from non-euro zone countries weakened, and output rose only modestly. German industry data for December is due on February 6 and 7.
Writing by Michelle Martin; Editing by Susan Fenton