Dec. 16 (Bloomberg) -- Business confidence in Germany, Europe's largest economy, climbed to a five-year high in December, suggesting economic growth will accelerate as increasing exports help fuel corporate investment.

The Ifo confidence index, based on a monthly survey of 7,000 executives, rose to 99.6 from November's 97.8. Economists expected the Munich-based institute's indicator to rise to 98.2, the median of 40 estimates in a Bloomberg survey showed.

The euro's 12 percent decline against the dollar this year is making exports more competitive, increasing sales for companies including ThyssenKrupp AG, Germany's biggest steelmaker, and Audi AG, the luxury carmaker. Economic growth may accelerate next year as businesses invest in new machinery to meet foreign orders, according to the Organization for Economic Cooperation and Development. Germany accounts for about one-third of the euro- region economy.

``Today's reading suggests the economic upswing in the euro zone is going to continue into next year,'' said Lorenzo Codogno, co-head of European economics at Bank of America in London. That means the European Central Bank ``will continue to gradually increase interest rates.''

Faster growth in the 12 nations that share the euro encouraged the ECB to raise interest rates for the first time in five years this month to keep inflation under control. The bank increased its benchmark rate by a quarter point to 2.25 percent.

Exports, Investment

Germany's benchmark DAX stock index rose as much as 1.1 percent today and was at 5335.72 at 2:05 p.m. in Frankfurt, taking its gains this year to 25 percent.

``The strong world economy, combined with a noticeable improvement in the price competitiveness of German companies, is supporting'' confidence, Klaus-Peter Mueller, chief executive at Commerzbank AG, Germany's third-biggest publicly traded bank, said in an interview today.

ThyssenKrupp plans to increase its output of electrical steel, which is used mainly in transformers, by 25 percent by fiscal 2007 to meet demand from Asia. At the same time, it has agreed to buy three companies to expand its repair service business for the power industry in Germany.

Germany's exports will grow 6 percent next year and companies' spending on items such as machine tools and computers will increase by more than 4.5 percent, Juergen Thumann, president of Germany's BDI industry association, said in an interview on Dec. 8.

Euro's Decline

``Export expectations clearly rose again,'' said Gernot Nerb, an economist at the Ifo institute. A gauge of business expectations rose to 99.6 in December from 97.8 in November. The euro's decline ``has definitely helped somewhat. Companies don't expect another appreciation of the currency,'' Nerb said.

The euro's retreat since reaching a record $1.3666 on Dec. 30 is buoying foreign demand for products from Germany, the world's largest exporter of goods. The currency was trading at $1.2011 at 4:14 p.m. The BGA exporters' and wholesalers' association predicts Germany will export 780 billion euros ($938 billion) of goods this year, an increase of almost 7 percent from 2004.

Crude oil prices have dropped 15 percent since reaching a record $70.85 a barrel on Aug. 30, easing the burden of energy costs on companies and consumers.

``At the German companies we talk to, the tone is more positive than ever,'' said Jean-Michel Six, chief European economist at Standard & Poor's in London. ``With the combination of export performance and the pickup in business investment in Germany, the economy is much more balanced and much more competitive on an international basis.''

Accelerating Growth

German economic growth may accelerate to 1.8 percent next year from 1.1 percent this year, the OECD said Nov. 29. Investor confidence rose the most in more than 12 years in December on signs the export-led economic expansion is encouraging companies to invest.

Audi, the luxury division of Volkswagen AG, Europe's largest carmaker, said Dec. 7 it will spend as much as 4 billion euros through 2007 on new models as the carmaker tries to increase annual sales to 1 million vehicles.

``Export growth is strong and that is supporting the domestic economy,'' said Andre Schwarz, a director for the BGA, which represents 135,000 companies employing 1.35 million people. ``But exports alone won't be enough to create new jobs and revive consumption. We can't be too happy with the outlook.''

Job Cuts

Household consumption contracted for a third straight quarter in the three months through September, the Federal Statistics Office said Nov. 22, as higher energy costs and unemployment at 11.5 percent discouraged spending.

Deutsche Telekom AG's supervisory board on Dec. 12 approved a plan by Europe's largest telephone company to eliminate 32,000 German positions after more than two years of shrinking revenue at its traditional phone business.

``There won't be a turnaround in the labor market until the second half of next year,'' said Sylvain Broyer, an economist at Ixis CIB in Frankfurt. ``The ECB certainly isn't in a hurry to raise rates again. They'll want to show they're not hurting growth.''

The ECB predicts euro-region growth will accelerate to about 1.9 percent next year from 1.4 percent this year, according to forecasts published Dec. 1. The bank expects inflation to stay at or above its 2 percent ceiling in 2006 and 2007.

Higher ECB Rates?

European inflation slowed more last month than initially reported after energy prices retreated. Consumer prices in the dozen euro nations rose 2.3 percent in November from a year earlier, the smallest increase since August and below a Nov. 30 estimate of 2.4 percent, the European Union's statistics office said in Luxembourg today.

The ECB ``signaled they may only raise rates once,'' said Ifo's Nerb. ``That appeared to have a positive effect on companies.''

ECB President Jean-Claude Trichet said this month's decision to raise rates doesn't signal a series of increases. Council member Erkki Liikanen said Dec. 12 the ECB's monetary policy ``still clearly continues to support growth.''

Investors are betting the ECB will raise its benchmark rate to 2.5 percent by the end of the first quarter and to 2.75 percent by the end of the third, futures trading shows. The implied rate on the three-month contract for March settlement was at 2.70 percent today, while the rate on the September contract was at 2.98 percent.

The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's benchmark rate since the currency's launch in 1999.

To contact the reporter on this story: Matthew Brockett in Frankfurt at mbrockett1@bloomberg.net .