German business confidence rises considerably …

German business confidence rose to the strongest in 20 months in a signal that the pace of recovery is quickening in Europe’s largest economy.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, increased to 109.5 in December from 109.3 in November. That matches the median prediction of 39 estimates in a Bloomberg News survey and is the highest level since April 2012.

Germany is relying on domestic growth as the euro area, its biggest trading partner, struggles to sustain a recovery. Survey data this week signaled a pickup in economic activity and the Bundesbank said German gross domestic product will rise “strongly” in the coming months after a slow start to the fourth quarter.

“Germany’s economy is ending the year on a very strong note,” said Christian Schulz, an economist at Berenberg Bank in London. “The Ifo index points to a further acceleration in investment momentum. Strengthening German domestic demand should also help the euro-zone crisis countries pursue their export-led growth strategies successfully.”

A measure of current conditions slipped to 111.6 in December from 112.2, while a gauge of expectations jumped to 107.4 from a revised 106.4, Ifo said in its report.

The euro was little changed at $1.3748 at 11:30 a.m. in Frankfurt. Germany’s DAX (DAX)stock index rose 0.9 percent to 9,170.

Economic Headwinds

German investor confidence surged this month to the highest level in seven years and manufacturing output expanded at the strongest pace in 2 1/2 years, survey data show. Daimler AG’s Mercedes-Benz, the world’s third-biggest maker of luxury cars, said yesterday it will ask its employees to work more hours next year to meet demand for new models.

The nation still faces headwinds from the subdued recovery in the rest of the 17-nation currency bloc. The European Central Bank forecasts the euro-region economy will contract 0.4 percent this year before growing 1.1 percent in 2014. Policy makers kept their benchmark interest rateat a record low of 0.25 percent this month after a surprise cut in November.

German industrial production and factory orders declined in October. RWE AG, the nation’s second-largest utility, said on Nov. 14 that profit next year will almost halve on the weak outlook for power prices, and that it plans to cut about 10 percent of its jobs.

Growth Outlook

“Next year, compared with the last two years, we will have rather strong growth but not a boom,” said Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt. “There will be no significant improvement of the situation in large countries like Italy and France, and this will put a brake on the German economy.”

Another headwind may be concessions to her coalition partners made by Angela Merkel, who was sworn in yesterday for her third term as Chancellor almost three months after she won elections. The deal between her Christian Democratic bloc and the Social Democrats includes a national minimum wage and increased spending on pensions.

Even so, economists surveyed by Bloomberg News predict that German GDP will increase 1.7 percent in 2014 and 1.8 percent in 2015. The economy grew 0.3 percent in the third quarter after a 0.7 percent expansion in the three months through June.

“The take-away from today’s Ifo remains that the sentiment momentum in Germany is building, especially in the manufacturing sector, which is good news for the economy,” said Evelyn Herrmann, an economist at BNP Paribas SA in London.

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