BEIJING, Jan. 27-- German business confidence unexpectedly rose to an 11-month high in January as oil prices fell, the euro retreated from a record and companies in Europe's biggest economy became more optimistic about domestic demand.

The Munich-based Ifo institute said its business confidence index, based on a survey of 7,000 executives, rose to 96.4 from 96.2 in December. Economists foreca st a decline to 96, according to the median of 41 estimates in a Bloomberg survey.

The euro's 5 per cent drop from a record against the dollar last month eased concern an export-led recovery may fade before consumer spending picks up. SAP AG, the world's largest maker of business-management software, yesterday forecast license revenue will grow the most since 2000 this year as it wins more US orders.

"We think 2005 will be better than 2004 as far as consumer demand is concerned," said Wendelin von Boch-Galhau, chief executive officer of Villeroy& Boch AG, German maker of floor tiles and porcelain."I see a certain turnaround."

An index measuring future expectations rose to 97.6 from 96.5, Ifo said.

An index gauging current business conditions fell to 95.3 from 96. The improvement in expectations, led by retailers and builders, suggests"a continuation of the upswing, supported by somewhat more robust domestic demand," Ifo President Hans-Werner Sinn said.

The euro held gains against the dollar after the report and rose 0.2 per cent to US$1.299 at 10:04 am yesterday in Frankfurt.

The euro reached a record US$1.3666 on December 30, making European exports more expensive on overseas markets. The benchmark DAX 30 stock index was little changed at 4234.35 points.

With unemployment stuck at a seven-year high, consumer spending may take some time to recover.

Chancellor Gerhard Schroeder's government lowered its forecast for 2005 economic growth for the third time in nine months, to 1.6 per cent from an October 25 forecast of 1.7 per cent. The economy grew 1.7 per cent last year, boosted by exports, investment and five extra working days.

"Exports are fragile because of the strong euro," said Dennis Snower, head of the Kiel Institute for World Economics, which forecasts growth of just 0.8 per cent this year, the lowest of the six leading German research institutes."The hope is that consumption and investment rise in time to make up" for a possible slowdown in exports.

European Central Bank President Jean-Claude Trichet, Schroeder and Microsoft Corp Chairman Bill Gates are among policy-makers and executives who will discuss the outlook for the economy at the World Economic Forum in Davos, Switzerland, this week.

Global economic growth may come close to matching last year's three-decade high, according to International Monetary Fund estimates. US consumer confidence rose in January to a six-month high after the economy added more jobs and income grew.

Expansion in the United States, the No 2 buyer of German exports after France, probably slowed to an annualized 3.5 per cent in the fourth quarter from 4 per cent in the third, according to the median of 77 forecasts in a Bloomberg survey.

Growth in Europe has lagged behind, with the economy in the dozen euro countries expanding at half the pace of the United States last year, according to estimates by the Washington-based IMF. Finance ministers of Germany and France said this week the dollar's decline has unfairly punished European economies.

"In the long term, it's impossible for the economy to rely on exports," said Snower."A lot will depend on how the labour market develops."

Companies may step up hiring later this year after demand for exports sparked investment. In Germany, a 1.2 per cent increase in investment helped fuel growth last year, and an Ifo survey published last week showed industrial companies plan to increase spending on equipment this year.

Henning Kagermann, chief executive officer of SAP, said yesterday that"2005 will be a year of investment" for the Walldorf, Germany-based company.

The ECB(European Central Bank) said last week that risks to growth and to inflation have declined in recent weeks, after oil prices fell from a record, suggesting it may keep borrowing costs at a six-decade low to support the economy.

Oil prices have dropped to US$46.96 per barrel of Brent crude, from a record US$51.95 on October 27. They still gained about 16 per cent since the start of this year.

Investors expect the ECB to keep its main lending rate unchanged until at least the end of the first half, interest rate futures trading shows.

(Source: China Daily by Christian Baumgaertel)