German Business Confidence Rises to Five-Year High

The widely watched business climate index, calculated each month by the Ifo economic research institute, rose by 2.3 points to 102 points in January, Ifo said in a statement. It was the fifth monthly rise in a row and took the index to its highest level since May 2000.

The increase took analysts by surprise -- consensus forecasts had the January index remaining stable at around 99.7 points.

"After already improving sharply in recent months, the business climate index rose sharply again in January," said Ifo chief Hans-Werner Sinn. "Any doubts people might have about the strength of the current upturn, underway since last summer, will be further diminished by these numbers. The upward trend is gaining in strength and breadth."

Analysts were pleased by the numbers.

"From gloom to boom in less than a year," said Bank of America economist Holger Schmieding. "German business leaders, who were still ridden by 'angst' last spring, now seem to be almost dancing in the streets."

Reforms kick in

Germany finally appears to be reaping the fruits of wage restraint and painful structural reforms, he said.

"Having been the sick man of Europe for much of the last decade, Germany is, for once, resuming its traditional role of a motor of economic development in the heart of Europe," Schmieding said.

Business leaders' optimism is shared by the government. In Berlin, Economy Minister Michael Glos upgraded Berlin's growth forecast for the current year to 1.4 percent. Glos even boldly claimed that growth could even come out as high as two percent, double the 0.9 percent recorded last year.

For its monthly survey, Ifo polls around 7,000 companies on their assessment of current business and their expectations for the next six months.

"Companies are a lot more satisfied with current business than they were in December," Ifo chief Sinn said. "And they're a great deal more confident about the outlook for the next six months."

Economic spring in the air

The outlook for the euro zone's biggest economy has been brightening for some time, nurtured by a raft of positive real economic data. Earlier this month, investor confidence, as measured by the monthly economic expectations index calculated by fellow think-tank ZEW, topped a two-year high point.

"There is a definite sense of economic spring in the air in Germany. German business confidence is booming," said Bear Stearns economist David Brown. "This should be a massive confidence boost to recovery expectations."

Ixis economist, Laure Maillard, also said the Ifo numbers confirmed the German economy has been gaining momentum since the middle of last year.

Indeed, "January's sharp rise is all the more encouraging in that it came in a context of rising oil prices and euro-dollar exchange rate," she said.

Brown at Bear Stearns said the Ifo data were consistent with German GDP growth of more than 2 percent this year.

Schmieding at Bank of America said the strength of the Ifo data could persuade the European Central Bank to raise interest rates again soon.

"We expect the next quarter-point rate hike in March, followed by further moves in June and September," the analyst said.