March 26 (Bloomberg) -- German business confidence unexpectedly rose for a third month in March, suggesting Europe's largest economy is coping with near-record oil prices, a surging euro and a global credit squeeze.

The Munich-based Ifo institute said its business climate index, based on a survey of 7,000 executives, increased to 104.8 from 104.1 in February. Economists predicted a drop to 103.5, according to the median of 37 forecasts in a Bloomberg News survey.

German companies have increased efficiency and reduced labor costs, helping them remain competitive even after the euro gained 17 percent against the dollar in the past year and oil rose above $100 a barrel. Volkswagen AG is among firms that have increased profitability by convincing staff to work longer for less pay. Economic growth may pick up in 2009 after slowing in 2008, two of the country's leading economic institutes said last week.

``It's surprising how well the Germany economy is coping with the strong euro and the financial-market crisis,'' said Glenn Marci, a fixed-income strategist at DZ Bank AG in Frankfurt. The economic outlook will allow ``the European Central Bank to keep borrowing costs on hold this year.''

The euro rose more than a cent and traded at $1.5758 at 5:05 p.m. in Frankfurt. European bonds pared gains.

Hiring, Exports

Companies in Germany's metal, electronics and car industries created more jobs in January than at any time in the past four decades to meet orders, the Gesamtmetall lobby said yesterday. The group, which represents companies including Daimler AG, said ``the strong trend in exports has firmed.''

Exports jumped 3.8 percent in January, unemployment fell to a 15-year low of 8 percent in February, and investor confidence unexpectedly rose for a second month in March.

Ifo's gauge of expectations rose to 98.4 from 98.2, while the index of confidence in current conditions advanced to 111.5 from 110.3.

``Sentiment remains positive, order backlogs are full and we don't yet see a spillover from the financial crisis,'' said Harald Joos, Chief Executive Officer Demag Cranes AG, the world's largest maker of mobile harbor cranes. ``Of course there's a certain skepticism regarding the outlook'' for the economy.

The worst U.S. housing slump in a quarter century has pushed up credit costs and clouded the outlook for global growth. The Organization for Economic Cooperation and Development said March 20 the U.S. economy will fail to grow for the first time in more than six years in the second quarter.

Euro Record

German companies are already grappling with a 59 percent gain in oil prices over the past year and the euro's ascent to a record $1.5903 on March 17.

Peter Loescher, chief executive officer of Munich-based Siemens AG, said March 4 that the currency's appreciation is ``not easy'' for Europe's largest engineering company. Bayerische Motoren Werke AG, the world's biggest maker of luxury cars, said earlier this month the euro's strength hurt full-year profit.

Still, ``Germany is in much better shape than the rest of the euro-area economy,'' said Natascha Gewaltig, an economist at Action Economics in London. ``Order books are still full, which will lead to much stronger-than-expected first-quarter growth.''

German companies are benefiting from booming demand for their goods in emerging economies such as Russia and China. While export growth will slow to 5 percent this year from 8.5 percent in 2007, sales should still breach the 1 trillion-euro ($1.56 trillion) mark for the first time, the BGA exporters' lobby said March 12.

`Sound' Economy

Economic growth will accelerate to 1.8 percent in 2009, the IWH and RWI institutes said in separate reports on March 18. Halle-based IWH predicts growth of 1.5 percent in 2008 while Essen's RWI forecasts 1.7 percent expansion. The German economy grew 2.5 percent in 2007.

The ECB has so far signaled little willingness to follow its U.S. counterpart in cutting interest rates to bolster growth, saying Europe's economy is ``sound'' and inflation remains a bigger concern.

Investors have reduced bets that the ECB will lower its key rate from 4 percent, futures trading shows. The yield on the Euribor interest-rate futures contract maturing in December was at 4.03 percent today, up from 3.31 percent on Feb. 11.

To contact the reporter on this story: Simone Meier in Frankfurt at smeier@bloomberg.net

Last Updated: March 26, 2008 12:12 EDT