EUROPEAN CONFIDENCE in the economic outlook improved more than economists forecast to the highest in 3½ years in February, led by surging optimism in Germany.

An index of executive and consumer sentiment in the euro zone advanced to 107.8 from 106.8 in January, the European Commission in Brussels said yesterday. The reading is the highest recorded since August 2007.

Economists had forecast a February reading of 106.8, the median of 28 estimates in a Bloomberg survey showed.

A gauge of German economic confidence rose to 116.8 from 115.5.

The euro zone economy is showing signs of gathering strength, giving companies more room to pass on higher commodity costs.

German business confidence jumped to a record this month and the region’s services and manufacturing growth accelerated. BASF SE, the world’s largest chemical company, said yesterday that it is “optimistic” about this year.

“The strong February sentiment reading confirms that the euro zone economy as a whole started this year with solid forward momentum,” said Martin van Vliet, an economist at ING Group in Amsterdam.

“However, the recent surge in oil prices, if sustained, might start to dent confidence soon. Sentiment may very well have hit a peak.”

A gauge of sentiment among euro zone manufacturers rose to 6.5 this month from 6.1 in January, yesterday’s report showed. Services confidence jumped to 11.1 from 9.9 and an index of consumer confidence advanced to -10 from -11.2.

Sentiment among builders rose to -24.3 from -26.

Economic confidence also improved in Spain and the Netherlands, while declining in France, Italy and Belgium.

The German economy, Europe’s largest, may continue to drive the region’s expansion this year after unusually cold temperatures sparked a construction slump in the fourth quarter and eroded economic growth. German investor confidence rose in February and output accelerated.

Unemployment dropped to the lowest in almost two decades last month. – (Bloomberg)