October 25, 2016 / 9:02 AM / in 2 years

REFILE-UPDATE 1-German business climate hits 2-1/2 year high in October

* Ifo’s business climate index rises to 110.5 in October

* Improved sentiment in manufacturing and construction

* Surprisingly strong data points to solid growth in H2

By Michael Nienaber

BERLIN, Oct 25 (Reuters) - German business morale improved unexpectedly in October, hitting its highest level in 2-1/2 years, suggesting company executives have become more optimistic about the growth prospects for Europe’s largest economy.

The surprisingly strong business climate index, published on Tuesday by the Munich-based Ifo economic institute, gave a further boost to hopes that a widely expected slowdown of the German economy could be less severe than previously feared.

The data also helped Germany’s DAX top-30 index to touch a new 2016 peak of 10,827.72 points shortly after its release.

“These are very good figures. The German economy is again significantly stronger, which is mainly due to an upturn in the manufacturing sector,” Sal. Oppenheim economist Ulrike Kastens said.

Construction was also booming, she said.

“It looks like we’ll see a good year-end performance,” Kastens said.

Ifo’s business climate index, which is based on a monthly survey of some 7,000 firms, rose to 110.5 in October from 109.5 in September. This was the highest reading since April 2014 and stronger than the Reuters consensus forecast for an unchanged value.

“The upturn in the German economy is gathering impetus,” Ifo head Clemens Fuest said.

Company bosses were more content with their current business situation and they were far more optimistic about the coming six months.

The rise in the headline figure was driven by improved sentiment in the manufacturing and construction sectors, while the business climate in wholesaling and retailing deteriorated slightly.

Ifo economist Klaus Wohlrabe told Reuters that company executives had digested Britain’s vote to leave the European Union and positive signals from China and the United States were pleasing exporters.

He added that an impasse over a free trade deal between the European Union and Canada - which has not yet been signed because the French-speaking Wallonia region in Belgium opposes it - was not putting a dampener on the German economy.

“Business sentiment is solid overall and worries about lengthy and difficult Brexit negotiations also don’t seem to be a burden anymore”, Helaba economist Ralf Umlauf said.

“The economic momentum is likely to continue in the final quarter,” he added.

The German economy is expected to lose steam in the third quarter, after relatively strong growth rates of 0.7 percent in the first and 0.4 percent in the second.

For 2016 as a whole, the government expects the economy to grow by 1.8 percent, which would be the strongest rate in five years, helped by soaring private consumption and higher state spending. (Reporting by Michael Nienaber; Editing by Paul Carrel and Angus MacSwan)

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