BERLIN German consumer morale rose unexpectedly to its highest level in over five years going into November, market research group GfK said, suggesting domestic demand will carry the economy through a global slowdown.
The better-than-expected reading comes after other data had suggested Europe's largest economy and growth locomotive is running out of steam, with the private sector shrinking, business sentiment plummeting, industrial orders falling and unemployment rising. Exports have risen, however, and investor morale has picked up.
The forward-looking consumer sentiment indicator, based on a survey of around 2,000 Germans rose to 6.3 heading into November from an upwardly revised 6.1 in October, bolstered by a strong increase in income expectations.
The reading, which was the highest since October 2007, beat expectations in a Reuters poll of 24 economists for it to hold steady at 5.9 and overshot even the highest forecast for a rise to 6.0.
Consumers became noticeably more upbeat about their future earnings, partly due to their country's robust labor market. While unemployment rose for a sixth straight month in September, the joblessness rate remains close to its lowest level since Germany reunified in 1990.
The income expectations index broke a three-month run of declines to climb to 29.9 in October from 23.9 in September.
"Although the reduction in unemployment has recently come to a halt, experts anticipate a steady level of employment in the coming year, despite the economic slowdown," GfK said on Friday.
"Together with the positive trend in wages and salaries, which also climbed in real terms, the labor market currently provides key support for income expectations."
Other supporting factors included German inflation easing to 2 percent in September, which has boosted purchasing power, and higher salaries.
While Germany has traditionally been a nation of savers, paltry interest rates are encouraging consumers to splash their cash, sending an index tracking their willingness to buy up to 33.9 in October from 33.1 the previous month.
"Ongoing uncertainty about further developments in the banking industry combined with a historically low interest rate level are not the best conditions for saving," GfK said.
"Instead, consumers are tending to invest their money in higher value purchases rather than bank deposits."
The stable labor market, higher wage deals and modest inflation also made consumers want to purchase more items.
That boosts expectations domestic demand will prop up the German economy through the euro zone crisis - which is weakening demand for its products in the single currency bloc - and a slowdown in Asian demand.
GfK confirmed its forecast that private consumption, which makes up around 60 percent of German gross domestic product (GDP), would rise by about 1 percent in real terms this year and said consumption would play an ever more crucial role.
"The weaker global economy is set to affect German exports. Accordingly, brisk consumption will be necessary to prevent Germany from sliding into recession," it said.
GfK said consumers had not become more worried about a recession in the autumn but had become slightly more optimistic about the outlook for the German economy.
The index tracking economic expectations rose to -15.8 in October from -17.2 the previous month but GfK warned that it was not yet clear whether this was a turning point.
"The signals from the economy are not particularly encouraging at the moment. This mainly applies to exports to the euro zone."
While Germany seemed to escape the euro zone debt and financial crisis relatively unscathed for a long time, growth slowed to 0.3 percent in the second quarter from 0.5 percent in the first as firms postponed investments due to concerns about the 17-nation bloc's troubles.
Some German retailers are nonetheless feeling the pinch, with sports apparel maker Puma (PUMG.DE) saying it was looking at more cost-cutting measures after third-quarter results came in below expectations, hit by a slowdown in Europe.
(Reporting by Michelle Martin; Editing by Catherine Evans)