The German economy grew at its fastest rate since 2000, bolstering confidence that solid expansion can be sustained despite this year's sales tax increase.

Gross domestic product (GDP) grew by 2.5 per cent, accelerating from 0.9 per cent in 2005, Federal Statistics Office data released yesterday showed. The growth rate, the fastest since 3.2 per cent in 2000, was in line with the mid-range forecast in a poll of economists and pulled Europe's largest economy out of a weak patch that held back the broader euro zone.

The data also showed productivity rose and domestic demand picked up in 2006 after years in the doldrums.

"What's especially positive is that the upturn is standing on two legs: on the one hand, exports and on the other, the revival of domestic demand through increased capital investment," said Sal Oppenheim economist Ulrike Kastens.

"We still expect a bit of a dip in the economy this year, but are very optimistic, on account of the positive sentiment indicators, that 2007 will be a very good year despite the increase in value added tax," she added.

Economy minister Michael Glos was quoted as saying there would be an upward revision of the government's 1.4 per cent GDP growth forecast for 2007.

The Munich-based Ifo institute's business climate index surged in December to its strongest level since reunification in 1990. A breakdown of the GDP figures showed productivity increased by 1.8 per cent last year, up from a 1.0 per cent advance in 2005. Domestic demand added 1.7 percentage points to 2006 growth, and net trade added 0.7 per cent.

Optimism among German firms, robust demand for exports and a pickup in the labour market are expected to support a 2007 expansion of around 1.8 per cent.

The 2006 growth rate compared with a euro zone average of 2.6 percent, the statistics office said, citing European Commission forecasts from last autumn.

There would be a one percentage point statistical boost in 2007's growth figures from 2006, the office said.