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German business confidence increased to the highest level in 17 months in December as the global recovery sparked a revival in exports and manufacturing growth.

The Munich-based Ifo institute’s business climate index rose to 94.7 from 93.9 in November. That’s the highest since July 2008 and exceeded the 94.5 median forecast of 33 economists in a Bloomberg News survey. The current conditions and expectations gauges also increased and the Ifo said the outlook for exports improved.

The figures contrast with a report this week showing investor confidence dropped for a third month in December and indicate executives are optimistic Germany’s recovery will maintain its pace. The Bundesbank this month raised its forecast for 2010 growth and Volkswagen AG in November posted the strongest monthly sales gains this year.

It “completes a positive end to a horrible year,” said Carsten Brzeski, an economist at ING Groep in Brussels. “Of course, the real economy is still lagging,” but the three- month average of the Ifo “predicts good news for industrial production in the months ahead.”

Exports

Ifo’s gauge of the current situation rose to 90.5 from 89.1 while an index of expectations increased to 99.1 from 98.9. The institute conducted the survey of 7,000 executives between Dec. 1 and Dec. 17. The overall business climate index fell to a 26- year low of 82.2 in March.

The euro remained higher against the dollar after the report, at $1.4384 as of 10:33 a.m. in Frankfurt from $1.4338 yesterday. German bonds were little changed, with the yield on the two-year note at 1.15 percent

Exporters are helping to fuel Germany’s recovery, overcoming a 14 percent appreciation in the euro since February high risk personal loans. Manufacturing expanded for a third month in December, a report this week showed. Sales at Volkswagen, Europe’s largest carmaker, rose 19 percent in November from a year earlier, it said on Dec. 11. Daimler AG, the world’s second-largest maker of luxury cars, said that the Mercedes-Benz Cars unit’s fourth- quarter sales will rise “significantly.”

“At the moment, it’s mainly exports which are driving the manufacturing industry,” Ifo chief economist Gernot Nerb said in a Bloomberg Television interview. “Exports to China, to Asia, are bringing some momentum.”

Pace of Recovery

The end of some government stimulus measures and market turmoil stemming from concerns over Greece’s fiscal problems are nevertheless casting doubt on the pace of recovery. Factory orders and industrial production fell in October, according to reports this month.

The Bundesbank says German economic growth will slow in the current quarter from the 0.7 percent rate recorded in the third, when expansion was boosted by stimulus spending.

The central bank still expects the economy to grow 1.6 percent in 2010 after a contraction of 4.9 percent in 2009. It previously forecast the economy would stagnate in 2010.

“The assessment of the current situation shows that economic growth in the fourth quarter will be almost as strong as the expansion in the excellent third quarter,” said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. “However, economic dynamics will weaken at the beginning of next year.”

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