OPTIMISM that the worst of the eurozone debt crisis is over has helped German investor and analyst sentiment soar to its highest level in nearly three years this month.
In the latest sign that Europe's largest economy is bouncing back after a dismal end to 2012, the Mannheim-based ZEW think tank said on Tuesday its monthly poll of economic sentiment rose to 48.2 points in February from 31.5 in January.
It was above the highest forecast in a Reuters poll and much higher than the consensus for 35.0 points.
The news, along with other recent data suggesting the German economy will avoid recession, will come as a relief to the centre-right government of Chancellor Angela Merkel, who is campaigning to win a third term in a September election.
"Financial market experts have made their peace with the weak fourth quarter of 2012," said ZEW president Wolfgang Franz. "In their opinion the German economy faces less headwinds from the euro crisis than throughout the last months."
The better-than-expected reading, which a ZEW economist said was also fuelled by low interest rates, boosted the euro and European shares and sent German Bund futures lower, although particularly on the bond market the move was short-lived.
Germany's economy held up strongly during the first 2-1/2 years of the euro zone debt crisis but sputtered in the second half of 2012 as firms postponed investment and exports suffered due to a gloomy economic outlook in Europe and elsewhere.
Economists expect a moderate return to growth in the first quarter of the year after a 0.6pc contraction, but there is little hard data to support hopes that Europe's powerhouse economy will rebound quite as strongly as recent sentiment indicators suggest.
"This (rise) is still driven by the good mood on financial markets," said Alexander Koch of Unicredit. "But it's no bad supporting factor for the economy when financial markets don't go down the drain."
As euro zone peers suffered under their debt and the currency bloc fell into recession, German exports - usually the backbone of the economy - proved a drag on growth late last year and private consumption is becoming more important.
Market research institute GfK, which also publishes a monthly consumer sentiment indicator, said on Tuesday that private consumption would grow by 1pc after inflation this year after 0.8pc growth last year.
"Private consumption is making a stable contribution to the domestic economy," GfK chief Matthias Hartmann told a news conference in Nuremberg. "Given low interest rates and concerns about the future of the euro, purchases of durable goods are the trend for consumers."
Even as ZEW said the eurozone crisis had lost much of its horror, some risks remain to the outlook and German growth would likely not be dramatic, economists said.
Uncertainty has grown about a corruption affair in Spain and the political future of eurozone member Italy could still unsettle the currency bloc.
"If (Silvio) Berlusconi wins the election, the (reform) path could be in danger. Doubts about Italy's solidity could have serious consequences for the euro," said Norbert Barthle, budget expert for the Christian Democrats.