By Maria Martinez

BERLIN (Reuters) -German investor morale improved at the fastest rate in two years in February on expectations the economy will pick up under a new government after Sunday's election, although the current situation remains weak.

Investor morale improved more than expected, the ZEW economic research institute said on Tuesday, reporting an increase in its economic sentiment index to 26.0 points from 10.3 points in January.

Analysts polled by Reuters had pointed to a reading of 20.0.

"This rising optimism is probably due to hopes for a new German government capable of action," said ZEW president Achim Wambach.

After a period of absent demand, private consumption can be expected to gain momentum in the next six months, Wambach added.

The clear rise in ZEW economic expectations underpins the positive economic trends of recent weeks, such as an increase in manufacturing orders and falling inflation, said Thomas Gitzel, chief economist at VP Bank.

"There is therefore good reason to hope that the economy is currently bottoming out and that things will gradually improve from the spring months onwards," Gitzel said.

Conservative leader Friedrich Merz is favourite to emerge as chancellor of a coalition government after the election and investors hope the new government will increase spending, although close observers of the German economy do not expect this election to yield dramatic change.

Two major economic institutes are already forecasting a third year of economic contraction in 2025, the longest period of weakness in Germany's post-war history.

POOR CURRENT ASSESSMENT

The ZEW survey showed the assessment of the current economic situation also improved, although more modestly and still weak, rising to minus 88.5 points this month from minus 90.4.

The current situation remains at a very poor level, Alexander Krueger, chief economist at Hauck Aufhaeuser Lampe said.

"For a real turnaround in sentiment, higher expectations must also be reflected in a better situation," Lampe said. "If things go well, economic output will hardly more than stagnate in the current quarter."

The German economy contracted in the final quarter of last year, reigniting recession fears.

If the trend continued in the first quarter of 2025, economic dynamics in Germany would again meet the definition of a recession.

The scores, in a range from minus 100 to plus 100, are based on a survey of about 350 Germany-based financial analysts at banks, insurers and large industrial companies.

Further increases in the ZEW are likely, given that European Central Bank easing of interest rates is set to continue and there should be a clearer fiscal picture in Germany after Sunday’s election, said Melanie Debono, senior Europe economist at Pantheon Macroeconomics.

(Reporting by Ludwig Burger and Maria Martinez, Editing by Friederike Heine, Ludwig Burger and Susan Fenton)