German business morale hit its highest level in almost two years in March as rising demand for manufactured goods kept factories in Europe's largest economy humming through rising coronavirus infections and lockdown restrictions, a survey showed today.

The Ifo institute said its business climate index shot up to 96.6, the highest reading since June 2019, from an upwardly revised 92.7 in February. 

A Reuters poll of analysts had pointed to a March reading of 93.2. 

"Companies were noticeably satisfied with their current condition," said Ifo President Clemens Fuest. "Despite rising infection numbers, the German economy started spring with confidence." 

The business climate in both the services and manufacturing sectors in Germany improved significantly, Ifo economist Klaus Wohlrabe said today, with manufacturing "exploding" due to strong demand from China and the US. 

Even in retail, among the sectors most severely hit by a lockdown, now in its fourth month, imposed to try to contain the spread of the coronavirus pandemic, there had been a clear upswing, he added. 

Europe's largest economy was likely to shrink by 0.7% in the first quarter, he said.

Today's positive Ifo survey added to signs that the economy is getting through the pandemic relatively undisturbed in an election year marked by rising discontent with Chancellor Angela Merkel's handling of lockdowns and a slow vaccination campaign. 

Ifo said high demand for German goods pointed to an upswing in the industrial sector where optimism was at its highest level since November 2010. 

The survey also found that the service sector, which had been hit harder by lockdown measures in place since November, was also showing initial signs of a recovery.

Germany is struggling to contain a second wave of the coronavirus that has in recent weeks morphed into a third, forcing an extension of lockdown measures until April 18. 

Merkel was criticised earlier this week for causing confusion by reversing a short-lived decision for an extended Easter holiday designed as a circuit-breaker. 

"This nice surprise is in contrast to the chaos of the corona-fighting measures of the last few days," said Uwe Burkert, chief economist at LBBW. 

"It is rooted in the global recovery and the prospect of successful vaccination," he added.