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March 7 (Bloomberg) -- German manufacturing orders increased in January, driven by demand from countries outside the euro region for goods such as factory machinery.

Orders rose 1.4 percent from December, when they fell a revised 0.3 percent, the Economy and Technology Ministry in Berlin said in a faxed statement today. Economists predicted a 1.3 percent increase, the median of 42 forecasts in a Bloomberg News survey showed. From a year earlier, orders rose 14.3 percent.

Companies such as Bayer AG, Europe's second-largest chemicals maker, are investing more as export sales increase, aiding economic growth. The euro-region economy will grow about 0.7 percent in each of the first three quarters of 2006, the most since 2000, the European Commission said March 3.

``The orders situation in the German manufacturing sector is excellent,'' Klaus Baader, an economist at Merrill Lynch in London, said before the report. ``It strengthens the European Central Bank's resolve to tighten interest rates and gradually normalize them.''

The European Central Bank last week raised its benchmark interest rate for the second time in three months and indicated more increases are possible to curb inflation.

The euro's 13 percent decline against the dollar last year is underpinning German exports. The Economy Ministry said foreign orders rose 3.3 percent in January from December, due mainly to an 18.9 percent surge in demand for investment goods.

Domestic Rebound

Bayer said yesterday that fourth-quarter sales rose 16 percent as demand for plastics surged. The company is investing 700 million euros to add more plastics production in China as well as update plants in the U.S. and Germany. ``In our customer areas automotive, electronics, construction; for all three I see growth in 2006,'' Chief Executive Officer Werner Wenning said.

Euro-region manufacturing grew at the fastest pace in 19 months in February, and service companies including banks and airlines grew the most in more than five years, industry reports showed last week, suggesting export-led growth is spreading through the economy.

While demand from within Germany declined 0.6 percent in January, the ministry revised up December data to show domestic orders rose 0.4 percent instead of the 1.4 percent decline initially reported.

In a two-month comparison, which smoothes out short-term fluctuations, manufacturing orders grew 1.1 percent in December and January from October and November, with foreign orders gaining 1.7 percent and domestic orders up 0.3 percent.

Consumer Spending

``The signs are encouraging, but it needs a bit more time to develop into a self-sustaining recovery,'' said James Carrick, an economist at ABN Amro in London. ``Germany is still vulnerable to a deterioration in the global economy. It's not an environment where the ECB can tighten aggressively.''

The ECB said it expects consumer spending to pick up after three years of stagnation as companies start to hire and confidence in the economy grows. Euro-region retail sales increased 0.8 percent in January from December, the European Union's statistics office said yesterday.

Still, the Bloomberg purchasing managers' index yesterday showed European retail sales fell in February by the most in eight months, suggesting concern over unemployment and higher energy costs is deterring spending. Crude oil reached a record of $70.85 a barrel on Aug. 30 and traded at $63.20 yesterday.

ECB Rates

``So far the consumer indicators have been mixed,'' said Elwin de Groot, a senior economist at Fortis Bank NV in Amsterdam. ``That's one of the reasons why the ECB might hold off further rate increases for a few months to see how things develop.''

The ECB raised its forecasts for growth and inflation last week after increasing its benchmark lending rate to 2.5 percent from 2.25 percent.

The bank said the economy of the dozen euro nations will expand about 2.1 percent this year and 2 percent next year, up from a December forecast of 1.9 percent, while inflation will remain above its 2 percent ceiling in 2006 and 2007.

``Everyone knows we'll take appropriate measures to ensure price stability,'' President Jean-Claude Trichet told reporters in Paris yesterday.

Investors have increased bets the ECB will raise its main lending rate to 3 percent by September, futures trading shows. The yield on the three-month contract for September settlement was 3.18 percent today, compared with 3 percent on Feb. 22.

The contracts settle to the three-month euro area inter-bank offered rate for the euro, which has averaged 15 basis points more than the ECB's benchmark rate since the currency's launch in 1999.

To contact the reporter on this story: Matthew Brockett in Frankfurt at mbrockett1@bloomberg.net.

Last Updated: March 7, 2006 06:18 EST