Production in Europe's largest economy rose 1.6 percent in January, compared to -2.6 percent in December, driven by a sharp rise in construction output helped by a mild winter. The figures, which beat expectations for a 1.0 percent increase in a Reuters economist poll, may take the sting out of worse-than-expected January industry orders, which posted a surprise fall on Wednesday. "While new orders and retail sales disappointed, most confidence indicators actually increased and production expectations just recently returned to last summer's levels," said Carsten Brzeski, an economist at ING Bank, adding, however, that a recession could still not be ruled out entirely. "After two weak months, the German industry is picking up steam again. More is needed to ban recession fears for good," he said. The German economy shrank by 0.2 percent in the fourth quarter on weakening exports and private consumption. Many economists hope it will remain stable in the first three months of 2012, thereby avoiding the two successive quarters of contraction which define a recession. So far a solid job market has helped prop up consumer spending and consumer and business sentiment surveys remain upbeat. Many German companies have recently expressed optimism about this year's outlook. Deutsche Post DHL said earlier on Thursday it saw its sales and operating profit edging up this year and luxury carmaker BMW said on Wednesday it expected a new record in vehicle sales this year.