German business confidence has reached its highest level for five years, according to a closely-watched survey released yesterday, helping drive up the euro.

Munich's Ifo Institute said its business climate index rose to 99.6 in December from 97.8 in November, well above more modest expectations.

"We see this development remaining intact in the near future. The economic recovery is cautious but solid," said Ifo economist Klaus Abberger.

The latest survey, compiled from interviews with 7,000 managers, showed that the optimism at present and for the next six months is spread across all sectors, from construction and wholesale to retail.

Financial analysts shared the Ifo's optimism yesterday. "The stronger-than-expected surge in the Ifo business sentiment indicator is a great boost for recovery expectations and a positive sign that stronger growth is finally coming back on track," said Bear Stearns economist David Brown.

Two of Germany's six leading economic think tanks raised their 2006 growth forecasts last week to 1.5 and 1.6 per cent, compared with a joint forecast made in October of 1.2 per cent.

The German government said it shared the Ifo's optimism but said it was sticking to its current economic forecasts of 0.8 per cent growth for this year and 1.2 per cent for 2006. "This confirms our assessment of economic developments in Germany . . . we see a continuing economic upswing, particularly in the export sector. However, we still see no sustainable upswing in consumption," said a spokesman for the economic ministry.