German analyst and investor morale hit its highest level in more than 2-1/2 years in January, suggesting the eurozone crisis is no longer hurting Europe's largest economy as much as it was late last year.
The Mannheim-based ZEW think tank said its monthly poll of economic sentiment climbed for a second month to reach its highest level since May 2010, rising to 31.5 points from 6.9 in December. It was the biggest monthly rise in a year.
The reading beat a median forecast for 12.0 points in a Reuters poll, overshooting even the highest forecast for 23.5 points, and sending the euro higher and Bund futures lower.
"This is a huge upwards jump and a positive surprise. It reflects the improvement in the global economy, from better growth chances in China to orders in Germany's industrial sector," said Postbank chief economist Marco Bargel.
"Of course the improvement on the financial policy side also plays a role: the yields (paid by) the indebted eurozone states are declining. The survey could point to a better economic first half than expected."
ZEW economist Michael Schroeder said solving the fiscal problems in southern Europe was the main reason for the jump in the index and that its rise showed Germany's economy, which shrank 0.5 percent in the fourth quarter, had turned a corner and should start to grow slowly from now on.
That tallies with the view of the Bundesbank, which on Monday said Germany's economic slump should be short-lived and the economy could have already bottomed out.
Most economists expect Germany's economy to return to growth in the first quarter, avoiding the second consecutive quarter of contraction that would mean recession.
INVESTMENTS TO INCREASE
The improvement in sentiment fuels hopes that investments will rise again and help Germany's economy to revive.
"Investors seem increasingly confident that the European Central Bank's safety net has averted the risk of a catastrophic eurozone break-up for good," said Christian Schulz, senior economist at Berenberg Bank.
The ECB has resorted to extraordinary measures such as buying struggling states' bonds and pumping low-cost money into the economy. In September it announced a new and potentially unlimited bond-buying program which has yet to be tapped.
ECB President Mario Draghi suggested at his latest monthly news conference that the eurozone had reached a turning point, saying that economy of the 17-nation bloc would gradually recover in 2013.
ZEW President Wolfgang Franz said the survey suggested that companies could soon press ahead with investments that had been delayed because of market uncertainty.
"However, the economic situation of important trade partners is rightly considered to still be weak. This suggests that the German economy will further grow at a moderate level in 2013," Franz said.
Germany's traditionally export-driven economy suffered a knock in 2012 as many countries in the eurozone, where Europe's paymaster sends around 40 percent of its shipments, were in recession and felt the effects of debt-cutting measures.
Slowing exports and weaker investments helped drag German growth down to just 0.7 percent last year.
But the positive ZEW reading chimes with the most recent Ifo survey, which showed confidence in the outlook at German businesses climbed in December at its fastest pace in 2-1/2 years.
The Ifo index, a key barometer of economic health in Germany, is seen rising for a third month in January when it is published on Friday. That, combined with the ZEW, suggests the economy could revive in the first quarter of this year.
"All in all, the indicators are showing that financial analysts increasingly expect a recovery of the German economy in spring after decline in economic output in the fourth quarter," said Stefan Kipar at Bayern LB.
The outlook for this year as a whole is nonetheless subdued, with the German government last week cutting its forecast for economic growth to 0.4 percent from 1.0 percent. Recent data has shown exports, imports and industrial orders sliding and output rising only very modestly.
But a separate ZEW gauge of current conditions rose to 7.1 this month from 5.7 in December, above the 6.0 consensus forecast. The ZEW survey of 272 analysts and investors was conducted between Jan. 2 and Jan. 21.
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