Germany's economic engine needs more than a little fine tuning

A study by the Ifo research institute found that its business climate index hit a five-year high of 98.7 in October, up from 96 a month earlier.

The result topped forecasts and is a boost for the new government charged with fixing the nation's finances.

Quicker growth should help to cut the budget deficit and unemployment rate.

'Firmer ground'

Late on Monday, Germany's main political parties said they now expect the budget to have a shortfall of almost 35bn euros (�24bn; $42bn) this year.

The economic recovery seems to be on firmer ground Ifo research institute

The worry is that to bring it in line with European Union limits, Germany may either have to implement spending cuts or tax hikes.

One way that it may manage to maintain spending at current levels would be if economic growth picked up, boosting corporate and consumer tax revenues.

While a boom still seems a long way off, the business environment continues to improve across all sectors, the Ifo said.

"The economic recovery seems to be on firmer ground," the research institute said in a statement.

"In manufacturing, the business climate improved again [and] firms gave clearly better assessments of their export opportunities."

"In the other three surveyed sectors - construction, wholesaling and retailing - the index also rose."

'Encouraging sign'

The increased optimism was echoed by outgoing Economy Minister Wolfgang Clement who said that German growth could now top estimates next year.

The government last week trimmed its growth forecast for 2006 to 1.2%, citing the effect of high oil prices.

However, Mr Clement said on Tuesday that there was "nothing to say that this forecast won't be exceeded".

Analysts also were upbeat, though voiced more caution.

"The good news is that [the improvement in the Ifo index] is broad-based," said Juergen Michels, an analyst at Citibank. "It's not just exports that is driving this, it's also the domestic oriented sectors.