By Michael Nienaber
BERLIN (Reuters) - German business morale improved unexpectedly in October, hitting its highest level in 2-1/2 years, suggesting company executives have become more optimistic about growth prospects for Europe's largest economy.
The surprisingly strong business climate index, published on Tuesday by the Munich-based Ifo institute, gave a further boost to hopes that a widely expected slowdown of the German economy could be less severe than feared.
"The upturn in the German economy is gathering impetus," Ifo head Clemens Fuest said, though a separate survey forecast a squeeze on German exports and domestic growth from Britain's vote to leave the European Union.
The Cologne Institute for Economic Research said it saw German exports to Britain falling by 6 percent next year due to the weakness of the pound following Britain's Brexit vote.
Britain is a major market for German companies, accounting for around 7 percent of exports overall. Weaker shipments to the UK and other Brexit-related risks would cost the German economy 0.25 percentage points of growth in 2017, the institute said.
Ifo's business climate index, based on a monthly survey of some 7,000 firms, rose to 110.5 in October from 109.5 the month before.
It was the highest reading since April 2014 and was stronger than the Reuters consensus forecast for an unchanged value.
The data helped Germany's DAX top-30 index <.GDAXI> to touch a new 2016 peak of 10,827.72 points shortly after its release.
"These are very good figures. The German economy is again significantly stronger, which is mainly due to an upturn in the manufacturing sector," Sal. Oppenheim economist Ulrike Kastens said. "It looks like we'll see a good year-end performance."
Company bosses were more content with their current business situation and were far more optimistic about the coming six months.
The rise was driven by improved sentiment in the manufacturing and construction sectors, while the climate in wholesaling and retailing deteriorated slightly.
Ifo economist Klaus Wohlrabe told Reuters company executives had taken account of Britain's vote to leave the EU, while positive signals from China and the United States were pleasing exporters.
Wohlrabe added that an impasse over a trade deal between the European Union and Canada - which has not been signed because of opposition from the Wallonia region of Belgium - was not putting a dampener on the German economy.
Helaba economist Ralf Umlauf said: "Business sentiment is solid overall and worries about lengthy and difficult Brexit negotiations also don't seem to be a burden anymore ... The economic momentum is likely to continue in the final quarter."
The German economy is expected to lose steam in the third quarter, after relatively strong growth rates of 0.7 percent in the first and 0.4 percent in the second.
For 2016 as a whole, the government expects the economy to grow by 1.8 percent, which would be the strongest rate in five years, helped by soaring private consumption and higher state spending.
For 2017, Berlin predicts a growth rate of 1.4 percent. Adjusted for the number of work days, the slowdown is expected to be less severe, with a predicted expansion rate of 1.6 percent.
(Editing by Angus MacSwan and David Holmes)