Will the economy grow fast enough for Chancellor Schroeder?

The latest monthly survey by the Ifo institute saw its closely-watched business climate index for west German firms rise to 91.9 from 90.8 in August.

It was the fifth month in a row that the index had risen, and its highest level since spring 2001.

But the Ifo institute said that a fall in companies' assessment of current business levels meant that it remained cautious about recovery prospects.

Caution needed

The steady rise in the business climate index has helped to lift optimism that the German economy is set to turn the corner, having fallen into recession in the first half of the year.

But the index looks at future expectations, and Ifo head Hans Werner Sinn said the fact that the index which looks at current conditions had fallen to 79.2 from 79.9 was a "call for continued caution".

"It's not assured that this will be a great recovery. It will be a hesitant upturn," Ifo economist Hans Guenter Russ told the Reuters news agency.

Ifo is predicting that the German economy will grow by 1.7% next year.

However, that may be insufficient if Germany is to keep its budget deficit within limits set by the EU.

In a draft budget presented to parliament earlier this month, German Finance Minister Hans Eichel assumed the economy would grow by 2% next year.