German business confidence increased in May for the first time in three months, adding to signs that growth in Europe’s largest economy is gathering pace.

The Ifo institute’s business climate index, based on a survey of 7,000 executives, climbed to 105.7 from 104.4 in April. That’s the first gain since February. Economists predicted sentiment to remain unchanged, according to the median of 44 forecasts in a Bloomberg News survey.

The German economy, Europe’s largest, grew just 0.1 percent in the first quarter after a 0.7 percent contraction in the final three months of 2012 as an unusually long winter damped construction and investment. While risks stemming from Europe’s debt crisis persist, the economy will gather pace in the current quarter, the Bundesbank said this week. Factory orders surged for a second month in March and exports increased.

Today’s “numbers are pretty good,” Holger Schmieding, chief economist at Berenberg Bank in London, said in an interview on Bloomberg Television. “After the weak first quarter was distorted by a harsh winter we will see a significant bounce in the second quarter.”

Ifo’s gauge of executives’ expectations remained unchanged at 101.6, while a measure of current business conditions increased to 110 from 107.3.

Consumer Confidence

The euro jumped more than half a cent after the release and traded at $1.2961 at 12:04 p.m. in Frankfurt. European stocks declined for a second day after the Stoxx Europe 600 Index yesterday dropped the most in 10 months. It slid 0.4 percent today to 302.89. Germany’s benchmark DAX index is down 0.8 percent at 8286.14.

First-quarter growth in Germany was driven mainly by household spending, which rose 0.8 percent from the final three months of 2012, the Federal Statistics Office in Wiesbaden said today. At the same time, construction fell 2.1 percent and capital investment dropped 1.5 percent.

German consumer confidence will jump to the highest in more than 5 1/2 years in June as low unemployment and receding inflation encourage households to spend, GfK AG said today.

“The German economy can recover further in the course of the year, but the process will probably be rather slow,” GfK said, adding that exports to the euro area “will probably develop moderately.”

The 17-nation euro economy, Germany’s biggest export market, shrank 0.2 percent in the first three months this year.

It was the sixth straight contraction, making the current recession the longest in the currency’s 14-year history.

ECB Action

The European Central Bank cut its benchmark interest rate to a record low of 0.5 percent on May 2 and President Mario Draghi said he stands ready to act again if the economic outlook deteriorates.

“Our measures gave breathing space from markets driven by panic,” he said yesterday at a speech in London. “Today we are seeing some encouraging signs of tangible improvements in financial conditions.”

Source: Bloomberg