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German economic prospects brighten

Berlin - The German economy has had a good start to 2015 thanks to falling oil prices and an export-boosting slump in the euro. But can Europe's biggest economy maintain the momentum?

The German economy has entered the new year on a high note, with low prices and the slump in the value of the euro helping to brighten the growth prospects for Europe's economic powerhouse.

The government of chancellor Angela Merkel on Wednesday revised up its 2015 growth forecast, to 1.5%, amid a surge in consumer confidence and employment.

The latest data stands in sharp contrast to a few months ago, when the German economy was on the brink of recession and the outlook was grim, in no small part due to the crisis in Ukraine.

Since then, plummeting oil prices and the sharp fall in the euro - a direct consequence of the European Central Bank's (ECB) plan to pump €60bn a month into the faltering eurozone economy -have boosted optimism about Germany's economic prospects.

"The German economy is continuing along the road to recovery," said Commerzbank economist Ralph Solveen.

"We assume that this upward trend will continue in the coming months because of the economic tailwind resulting from the weaker euro and cheaper crude oil," he said.

Analysts predict that data due to be released on Thursday will show unemployment falling for the fourth consecutive month in January, with the recent pickup in hiring boosting tax revenue and helping the government balance its budget a year earlier than expected.

Government plans to spend about €10bn over the next four years on infrastructure development have added to the more positive economic outlook.

Germany's closely-watched Ifo business confidence indicator rose for the third consecutive month in January, reaching its highest level in six months.

At the same time, German investor confidence has surged to an 11-month high, according to a survey released last week by the Mannheim-based ZEW institute. Export expectations are also up, rising for the fourth month in a row in January.

"The signs of a recovery in the making have become even stronger and more unambiguous," said Andreas Rees, chief German economist with UniCredit.

While oil prices have dropped about 50% since the middle of last year, the euro has slumped to around $1.134. It was almost $1.40 in May.

"The improved export opportunities apply to almost all major sectors of German industry," said Ifo chief Hans-Werner Sinn, who noted that the rebound in the US economy is also helping drive global trade.

Provoking the fall in the European common currency is last week's announcement by the ECB of a €1trn stimulus plan for the 19-member eurozone.

Despite misgivings from the German political establishment about the ECB monetary expansion programme, the nation's investors have celebrated the bank's plans by driving the Frankfurt stock market's leading DAX index to record highs.

German Economics Minister Sigmar Gabriel concedes that German exporters, particularly the nation's key small-to-medium sized businesses, will benefit from the euro's drop.

But hanging over the German economy is the weak demand among its key eurozone trading partners, as well as the constant threat of an escalation of tensions in eastern Ukraine.

Whatever concerns there may be on the trade front, the Eonomics Ministry has pointed to domestic demand as a pillar of growth in 2015, with a 2.7% rise in real wages and a solid labour market helping drive consumer spending.

"German consumers have evidently also been affected by the major collapse in energy prices over the past few weeks," the GfK said as it released its forward-looking consumer confidence indicator.

"Reduced costs of fuel and heating oil are boosting disposable income, giving consumers greater freedom for other spending or purchases," it said.

The GfK expects the index to hit its highest level since November 2001 next month, with the institute's survey of German household showing big gains in income and spending expectations.

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