By Michael Nienaber
BERLIN (Reuters) - German industrial output rose more than expected in January, driven by strong demand for machinery, cars and other capital goods, suggesting Europe's biggest economy started into 2017 on a solid footing despite the threat of rising protectionism.
The figures, published by the Economy Ministry on Wednesday, gave some reassurance that Germany's economic upswing is likely to continue after data on Tuesday showed that industrial orders posted their biggest monthly slump in eight years.
"Industrial production is back on track," Bankhaus Lampe economist Alexander Krueger said, adding that factories would push up overall economic growth in the first quarter of 2017.
In another positive sign for increased business activity, a survey from the Ifo economic institute showed on Wednesday that industry companies plan to hike investment by 5 percent this year after an increase of roughly 3 percent in 2016.
Ifo head Clemens Fuest said Germany's domestic demand remained strong and there were also positive signs for exports.
"So we expect this economic upswing to continue for the time being," Fuest told n-tv televison, adding that U.S. President Donald Trump's protectionist plans could pose a threat for German exporters only in the medium term.
Industrial output jumped 2.8 percent on the month, the data showed. This was the strongest monthly increase since August 2016 and overshot the consensus forecast in a Reuters poll for a 2.5 percent rise. The December reading was revised up to a fall of 2.4 percent from a previously reported 3.0 percent drop.
COLD WINTER
January's increase was driven by a 3.7 percent rise in manufacturing output, with demand for machinery, vehicles and other capital goods jumping 6.1 percent - the strongest monthly increase since August 2013.
Construction production fell 1.3 percent while energy output edged down 0.7 percent, the data showed.
"The cold winter weather is still taking its toll on the construction sector, which shrank for the second month in a row," ING economist Carsten Brzeski said.
"Given the cold February, the negative trend in the construction sector could continue another month before returning as an important growth driver for the entire economy."
The Economy Ministry said the rise in January was above the average development in the fourth quarter, adding that sentiment surveys signaled a positive business climate, meaning the industrial upswing is likely to gain further momentum.
Bankhaus Lampe's Krueger gave a more cautious outlook. "The tailwind from industry for overall economic growth will ease significantly after the first quarter of 2017," he said.
Unicredit (MI:CRDI) chief economist Andreas Rees said the latest data gave reassurance that the German economy was performing well. "The combination of a pick-up in global trade and robust domestic demand bodes well for future growth," Rees added.
He added, however, that the next round of business sentiment surveys from Ifo and Markit would be closely watched at the end of March.
"It will be interesting to see whether the discussed border adjustment tax in the U.S. will put a - psychological - dampener on German managers' minds or not," Rees said.
The German economy quadrupled its quarterly growth pace to 0.4 percent in the final three months of 2016 as higher state and household spending and construction more than offset a drag from net trade with imports rising more than exports.
Economists expect German economic growth to accelerate further in the first quarter of 2017. The government forecasts gross domestic product (GDP) to grow 1.4 percent this year.
This would be below the performance of 2016 when the economy expanded by 1.9 percent, the strongest rate in half a decade, driven by soaring private consumption, increased state spending on roads and refugees as well as higher investment in housing.