BERLIN (Reuters) - German manufacturing growth accelerated to its fastest pace in three years in January, a survey showed on Wednesday, boosting expectations that factories will contribute to an expansion in Europe's biggest economy at the start of 2017.

Markit's Purchasing Managers' Index (PMI) for manufacturing, which accounts for about a fifth of the economy, rose to 56.4 from 55.6 in December.

This was the highest level since January 2014 and above the 50 line that separates growth from contraction for the 26th consecutive month. The final figure was just one notch below the flash reading issued in late January.

"Germany's manufacturing sector started 2017 in much the same way that it finished 2016, with growth accelerating," IHS Markit economist Philip Leake said.


"The sector's impressive performance bodes well for GDP growth in the first quarter, building on the strongest expansion in five years across 2016 as a whole."

Manufacturers enjoyed increased demand from both domestic and foreign clients in January, the survey showed, with new orders rising at the fastest rate in three years.

The sector's overall solid performance was also underpinned by unusually strong job creation as factories hired new staff at a rate not seen since August 2011.

The rate of cost inflation accelerated sharply, with input prices climbing at the fastest since May 2011 and firms citing higher costs for commodities, steel, oil and energy.

"Some companies raised their tariffs to protect margins but, with the pace of cost inflation still far exceeding that for charges, there seems scope for further price hikes in the early part of the year," Leake said.

(Reporting by Michael Nienaber; Editing by Hugh Lawson)

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