Mar 26, 2012 08:43 AM EDT

German IFO Business Climate Improves Unexpectedly

German business sentiment rose unexpectedly for the fifth month in a row in March, signaling that Europe's largest economy continues to play in a league of its own and outpace other euro zone members struggling with the sovereign debt crisis.

The Munich-based Ifo think tank said on Monday its business climate index, based on a monthly survey of some 7,000 companies, rose to 109.8 in March from a revised 109.7 in February.

Days after data showed the first contraction in German manufacturing this year, the closely-watched Ifo index bucked expectations for a steady reading and rose to its highest level since July 2011.

"German Ifo: is the sky the limit?" said Carsten Brzeski, economist at ING in Brussels. "The strong labor market, filled order books and low inventories still bode well for growth in the coming months, albeit at a low level."

The German economy has gone from strength to strength since emerging from the 2009 financial crisis, interrupted only by a 0.2 percent contraction in the last quarter of 2011 when the debt crisis spread from Greece to other euro zone partners.

But economists expect that to have been a blip, prompting some think tanks to sharply raise their growth forecasts. IWH Halle institute expects the German economy will grow by 1.3 percent this year. The government forecasts a 0.7 percent expansion, with growth picking up after a modest first quarter.

An Ifo sub-index on current conditions remained steady at 117.4 and a reading on expectations rose slightly to 102.7.

Still, risks remain on the horizon. Ifo economist Klaus Wohlrabe told Reuters that while inflation and high oil prices were not a big danger for firms at the moment, they posed potential risks.

The euro rose against the dollar and German Bund futures pared gains on the slightly better than expected data.

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