The German economy got two shots in the arm yesterday after the Ifo business confidence index neared a six-year high and the government forecast growth of 1.4 per cent and a drop in unemployment for 2006.

Munich's Ifo Institute said its business climate index rose to 102 from 99.7 in December, leaving the closely-watched business barometer at its highest level since May 2000.

"The upswing has gained both in breadth and momentum," Ifo president Hans-Werner Sinn said in a statement.

"Doubts regarding the durability of the upswing, which has been noticeable since last summer, should be further dispelled by these results."

The Ifo report said that domestic demand - the weak spot in the German economy - appears to be improving significantly, particularly in construction and retail.

Hours later, German economic minister Michael Glos said he was "mutedly" optimistic that consumer demand was picking up. He presented an official government economic forecast of 1.4 per cent growth this year, up from 0.9 per cent in 2005, driven by strong export demand.

He said unemployment would drop by 350,000 to an average of 10.9 per cent in 2006, down from 11.7 per cent last year.

"We have reason to look with confidence into the future," said Mr Glos.

"The coalition partners specifically asked for a 'cautious forecast' of the main data. This time we have the chance to be overtaken by the actual developments", he said, before adding that "growth of up to 2 per cent is certainly possible".

He warned that 2007 could be a difficult year, predicting growth of just one per cent, with a three point hike in VAT due at the start of the year.