German business sentiment improved unexpectedly in November and separate data showed the country's economic upswing broadened in the third quarter, bolstering the view that eurozone interest rates will continue to rise next year.
The Munich-based Ifo research institute said its closely-watched business climate index, based on a monthly poll of around 7,000 firms, jumped to 106.8, equalling June's 15-1/2-year high, from 105.3 in October. Economists had expected the index to fall to 105.2.
The strong Ifo report followed data from the Federal Statistics Office showing buoyant private consumption, exports and investment powered growth of 0.6 percent in the third quarter. It was the seventh consecutive quarter of expansion and economists said the figures underscored how the export-led upswing had widened to include the domestic economy. The report also eased concerns that a hike in sales tax would seriously dent growth next year.
"We remain optimistic that Germany will keep some of its current momentum for next year and might weather the sales tax storm better than anticipated," said Erik Sonntag of ING Financial Markets.
"The European Central Bank (ECB) will not see any reasons to deviate from its current course of a gradual reduction in monetary accommodation," he added. The ECB has raised its benchmark rate by 125 basis points since last December and policymakers have signalled borrowing costs will be tightened further next month.
Markets expect another hike in the first quarter of next year, although Germany's planned three-point increase in value-added tax (VAT) and slowing US growth cloud the outlook beyond that. Eurozone government bond futures fell and the euro hit its highest level since early June after the Ifo survey.
Prices for March and June Euribor futures showed markets now think there is a 58 percent chance rates will rise to 3.75 percent by the end of March, compared to a 44 percent chance before the data.
Underscoring the strength of the euro region economy, surveys published on Thursday showed Italian and Dutch business confidence both remained near record highs this month.
David Brown, chief European economist at Bear Stearns International in London, said he expected Germany's economy to expand by 1.5 percent next year after growth of around 2.5 percent in 2006, its best performance in six years.
A breakdown of the Ifo survey showed companies' assessment of current conditions had risen to 113.9 from 111.9 in October. The expectations component improved to 100.1 from 99.2, confounding expectations for a decline. "I don't know what to say. The positive sentiment among German companies is indescribable," said DekaBank economist Andreas Scheuerle in Frankfurt.
The third-quarter gross domestic product (GDP) data showed private consumption and net trade each contributed 0.4 percentage points to growth in the July-September period.
Investment in plant and equipment and construction spending each added a tenth of a point. Germany's exporters have profited from a global economic expansion in which emerging economies like China have sucked in goods to equip themselves with infrastructure to keep growing.
German industrial conglomerate Siemens reported stronger-than-expected fourth quarter operating profit earlier this month and said foreign business had been strong. Sales rose 28 percent in the Asia/Pacific region in its 2006 business year.