BERLIN German business morale brightened more than expected in April, hitting its highest in nearly six years, suggesting Europe's largest economy is set to carry its robust upswing into the second quarter despite political risks.
The surprisingly strong data, published by the Munich-based Ifo institute on Monday, added to signs that the German economy is firing on all cylinders as the European Central Bank's loose monetary policy supports a vibrant domestic economy and a rise in foreign demand helps exporters.
Ifo's business climate index, based on a monthly survey of some 7,000 firms, rose to 112.9 from an upwardly revised 112.4 in March. The reading, the highest since July 2011, came in stronger than a Reuters consensus forecast for a value of 112.5.
"The German economy is growing strongly," Ifo chief Clemens Fuest said in a statement.
Ifo economist Klaus Wohlrabe told Reuters that the German economy was not being influenced by political uncertainties such as the threat of rising protectionism, major elections in Europe and the course of Brexit negotiations.
"I think we'll see a really good first quarter," Wohlrabe said. He noted that a dip in expectations was mainly due to the industrial sector and did not signify a change in sentiment in the economy as a whole.
The Ifo survey was conducted in the first half of April. This means it does not include any reaction to the first round of the French presidential election on Sunday in which centrist Emmanuel Macron came in first, qualifying for a May 7 runoff alongside far-right leader Marine Le Pen.
"Should Emmanuel Macron also win the second round, German industry will be relieved," VP Bank economist Thomas Gitzel said. France is among Germany's most important trading partners.
Managers' assessments of the current business situation improved significantly while their outlook for the coming six months was a bit less optimistic.
Morale improved in construction, retailing and wholesaling whereas manufacturing firms were somewhat less upbeat.
In construction, assessments of the current business situation rose to a new record high while expectations remained broadly positive and the order level was excellent, Ifo said.
Construction firms are benefiting from a housing boom, fueled by a growing population, rising employment levels, higher job security as well as record-low borrowing costs.
"Germany's golden cycle has entered yet another round," ING economist Carsten Brzeski said.
"The only weak spot of the German economy remains rather sluggish investment," Brzeski noted, adding the government should further support domestic demand by stimulating higher private investments and increasing its own spending.
Germany's gross domestic product grew by 1.9 percent last year, the strongest rate in five years, helped by soaring household and state spending as well as increased construction that together more than offset a drag from net trade.
Strong industrial output and export figures for January and February have suggested that the economy shifted into an even higher gear in the first quarter of 2017, helped by rising global demand for cars and machines.
Economists expect Germany's quarterly growth rate to clearly pick up in the January-March period after 0.4 percent in the final three months of 2016.
The German government will publish its updated growth forecast for 2017 on Wednesday. Preliminary first quarter GDP growth data is set to be released on May 12.
The Bundesbank said in its latest monthly report, also published on Monday, that German growth likely accelerated sharply in the first quarter with industry and private consumption driving the expansion.
But the central bank warned that the growth potential could nearly halve by the middle of the next decade as the workforce will decrease by 2.5 million by 2025 and net immigration will not fully offset this.
Germany's VDMA engineering association said on Monday it could lift its growth forecast for this year if early signals of positive business sentiment persist and prove justified.
VDMA head Carl-Martin Welcker said higher demand from emerging markets such as Russia and India could lift engineering production this year while China, the United States and Britain were sources of uncertainty.
(Reporting by Michael Nienaber; Additional reporting by Irene Preisinger; Editing by Paul Carrel and Toby Chopra)