By Michael Nienaber
BERLIN (Reuters) - German business morale improved more than expected in May, reaching its highest level so far this year and suggesting Europe's biggest economy will extend its surprisingly strong start to 2016 into the next quarters.
The German economy expanded by 0.7 percent in the first three months of the year, its strongest quarterly growth rate in two years, driven mainly by soaring private consumption and higher construction investment.
Analysts had expected the economy to lose steam over the summer months, but the Ifo index for May, released on Wednesday, suggested that any slowdown could be very limited.
In another positive sign for the German economy, consumer morale further improved heading into June as shoppers remained upbeat, the GfK survey showed on Wednesday.
"The German economy remains on track," NordLB analyst Christian Lips said. "After an economic cooling in spring, due to the unusually strong first quarter, we can expect the economic upswing to gain pace again."
The Munich-based Ifo economic institute said its business climate index, based on a monthly survey of some 7,000 firms, rose to 107.7 in May from 106.7 in April.
This was the strongest reading since December 2015 and beat the Reuters consensus forecast for a reading of 106.8.
"The German economy is growing at a robust pace," Ifo chief Clemens Fuest said, adding that companies were significantly more satisfied with their current business situation and noticeably more optimistic about the coming months.
ING economist Carsten Brzeski said the Ifo index showed that "the worst nightmares of a global recession that spooked markets and economies in the first months of the year have clearly disappeared".
The rise of the index was driven by improved sentiment in all four main sectors of industry, with business climate among construction firms hitting the highest level since 1991.
"BEST OF ALL WORLDS"
"The German construction industry is currently enjoying the best of all worlds," DZ bank economist Michael Holstein said. He noted that rising property prices and low interest rates are boosting private demand for homes while the public sector is also increasing construction investment.
The strong Ifo index came after a purchasing managers survey showed on Monday that growth in Germany's private sector accelerated in May to its highest point this year, suggesting the economy will remain on a solid growth track.
Germany's strong domestic demand is more than compensating for sluggish export growth as an economic slowdown in emerging markets such as China and a possible British exit from the European Union are clouding the outlook.
A survey showed on Tuesday that the mood among German analysts and investors worsened unexpectedly in May as external risks, including a Brexit, are dampening growth expectations.
Ifo economist Klaus Wohlrabe said, however, that German companies do not appear to be concerned about the possibility of Britain leaving the European Union after a vote on June 23.
"In the German economy there does not seem to be any feeling of being unsettled with regard to the Brexit vote," he said, adding that private consumption was expected to remain an important growth driver in the course of the year.
He said the economy's strong performance in the first quarter and the robust May reading of the Ifo index pointed to an upward revision to the full-year growth forecast.
Germany's leading economic institutes said in mid-April they expected the economy to grow by 1.6 percent in 2016. The government predicts a GDP growth rate of 1.7 percent, on a par with last year.