German business morale climbed in January to its highest level since July 2011, suggesting Europe’s largest economy is on track for a strong start to 2014 after growing only modestly last year.

The Munich-based Ifo think tank’s business climate index, based on a monthly survey of some 7,000 firms, rose for a third straight month to 110.6, beating a consensus forecast for 110.0 and up more than a full point from a December reading of 109.5.

Ifo economist Klaus Wohlrabe said the strong survey suggested the German economy could grow by 0.5 per cent in the first three months of the year. That would be a major improvement on the fourth quarter, when the economy is estimated to have grown by around a quarter of a percentage point.

Surveys last week showed the German private sector growing at its fastest pace in more than two years and investor morale staying close to its highest level in nearly eight years, pointing to decent growth at the start of 2014.

"German businesses remain diehard optimists," said ING economist Carsten Brzeski. But he warned that the economy's performance last year was not as strong as "soft" privately-produced survey evidence would have suggested. "The small growth conundrum of the German economy continues. While soft indicators remain buoyant and both consumer and business confidence are close to all-time highs, hard data has been lagging behind and still is," he said. Still, the latest hard data has shown increases in industrial output, orders, exports and retail sales.

While Germany was a growth locomotive in the early years of the euro zone crisis, its performance tailed off over the last two years and it only managed an expansion of 0.4 per cent in 2013, its worst performance since the global financial crisis.

But economists predict gross domestic product (GDP) will increase by around 1.7 per cent this year thanks to strong domestic demand while exports are also expected to pick up.

Berlin is considering raising its forecast to 1.8 per cent from 1.7 per cent, a German magazine reported at the weekend. The Ifo survey showed firms were more optimistic about their future prospects than they have been in nearly three years and were more upbeat about their current business situation than at any time in the past 18 months.

Reuters