German business confidence surged close to a six-year high in January as increased optimism among retailers and manufacturers gave fresh impetus to a broadening economic revival in Europe's largest economy.
The Munich-based Ifo institute said its business climate index, based on a monthly survey of around 7,000 firms, rose to 102.0 from an upwardly revised 99.7 in December, taking the indicator to its highest level since May 2000.
News of the rise, which was the second in a row and the fourth in the past five months, sent the Bund future to a one-month low and briefly lifted the euro.
"There is a definite sense of economic spring in the air in Germany," said David Brown, an economist at Bear Stearns International.
"This should be a massive confidence boost to recovery expectations and it should vindicate the ECB's view that eurozone rates must press higher."
Ifo's business expectations component produced its strongest reading since November 1994. Firms' assessment of the current conditions was the most optimistic since January 2001.
"Doubts regarding the durability of the upswing, which has been observable since last summer, should be further dispelled by these results. The upswing has gained both in breadth and momentum," said Ifo President Hans-Werner Sinn in a statement.
Germany's economic expansion is expected to strengthen this year, as persistently strong demand for the nation's exports encourages firms to invest.
The construction sector is also expected to recover somewhat after years of recession. Analysts are optimistic growth could accelerate to as high as 2.0 per cent, which would be the fastest pace since 2000, from last year's rate of 0.9 per cent.
Some economists caution, however, that much of this year's growth will be a result of consumers bringing forward purchases to beat a three-per centage point hike in value-added tax (VAT) the government has proposed for the beginning of 2007.
The higher levy could hit consumer spending next year and lead to a fresh slowdown. German Economy Minister Michael Glos is due to present the government's latest economic report later on Wednesday and is scheduled to announce an upwards revision in the ministry's 2006 growth forecast to 1.4 per cent.