German business confidence strengthened in July as companies became less pessimistic about future activity despite the uncertainty surrounding the war in the Middle East, survey results from the ifo Institute showed on Monday.

The business climate index rose to a five-month high of 86.6 in July from 85.7 in the previous month. The reading was expected at 86.1.

The survey showed a significant improvement in expectations, while companies were somewhat less satisfied with their current situation.

"Despite the uncertain situation in the Persian Gulf, companies are less pessimistic," ifo Institute President Clemens Fuest said.

The current situation index posted 86.5 in July, down from 87.0 in the prior month. Meanwhile, the expectations index advanced to 86.7 from 84.3 in June.

"Even if the third consecutive increase in the ifo index is not yet a reason to prepare for the next growth party in Germany, it at least shows a certain resilience of the economy," ING economist Carsten Brzeski said.

The economist observed that the absolute level of the ifo index is still below its five-year-average, illustrating how slow and cumbersome the path out of stagnation still is.

In manufacturing, business confidence rose noticeably in July as expectations logged a significant boost. Assessments of the current situation were somewhat less favourable. Demand picked up, and material shortages eased.

Elsewhere, business climate in the service sector also improved. Service providers were less sceptical about the coming months. By contrast, they assessed the current business situation as slightly worse.

In trade, business confidence strengthened once again. Companies were somewhat more satisfied with their current business. Expectations were also less pessimistic.

In construction, business confidence picked up. Both assessments of the current situation and expectations improved.