The Bundesbank said it sees signs that the German economy will improve in the rest of this year, even after industrial output slowed.

“The essentially modest increase in industrial orders and the noticeable improvement in production and export expectations signal an upward trend for the following months,” the Bundesbank said in its monthly bulletin published today.

“Company investment confirms the evidence of a solid foundation, though signs of a dramatic upswing are lacking,'' it added.

German Chancellor Angela Merkel won an overwhelming endorsement from voters in a general election yesterday, helped by an unemployment rate near its lowest level in two decades and her handling of the euro crisis.

Business confidence in Europe’s largest economy rose to the highest in 16 months in August, despite the fact that German industrial orders and output fell in July.

“The extraordinarily good consumer climate is being sustained, supported by slowing inflation and the overall positive labor-market situation,” the Bundesbank said in its report.

The Ifo institute’s business climate index is forecast to rise for a fifth month in September, according to a Bloomberg News survey before tomorrow’s report. The gauge climbed last month to the highest since April 2012. German investor confidence is at a three-year high, according to the ZEW Center for European Economic Research in Mannheim.

But in a sign that the recovery is uneven, a preliminary measure of German industrial production unexpectedly fell in September.

The September purchasing managers’ index for manufacturing slid to 51.3 from 51.8, while the PMI for services rose to 54.4 from 52.8, data released by London-based Markit Economics showed today. A reading above 50 indicates expansion.

While Merkel’s Christian Democratic bloc took 41.5% of the votes in yesterday’s election, she is still short of a majority. Merkel lost her preferred coalition partner after the liberal Free Democrats failed to clear the 5% hurdle to enter parliament.

The Social Democrats, who got 25.7% of the votes, said they would take time to consider coalition options.

The Bundesbank said that Germany’s cost of borrowing will probably rise as the euro area recovers and investors’ need for safe assets declines. German 10-year bond yields are at 1.94%, while comparable U.K. gilts yield 2.92% and US debt is at 2.73%.