Jan. 13 (Bloomberg) -- The German economy, Europe's largest, grew at the fastest pace in four years in 2004 led by an increase in sales abroad.

Gross domestic product increased 1.7 percent from the year before, the Federal Statistics Office said in Wiesbaden today. That matches the median of 31 economists' forecasts in a Bloomberg survey as well as forecasts by five of the country's six leading economic institutes.

The fastest global expansion in nearly three decades fueled Germany's return to growth after a contraction in 2003. While exports have taken off, an unemployment rate at a six-year high and the euro's 8 appreciation against the dollar last year are clouding the outlook for 2005.

``It's great that we had growth, but you can't get away from the fact it came from abroad,'' said Anton Boerner, president of the Berlin-based BGA German exporters and wholesalers group. The rate of expansion ``is still far away from what we'd need to create jobs.''

The International Monetary Fund expects the global economy to expand about 4 percent this year after 5 percent in 2004, IMF Managing Director Rodrigo de Rato said in November. European Central Bank President Jean-Claude Trichet said on Jan. 10 he's ``confident'' about global growth.

Signs of Improvement

There are some indications that domestic demand may be picking up. Investment in equipment increased 4.1 percent in the third quarter last year. Consumer confidence rose to a six-month high and retail sales rose for a fifth month in six in December, the Bloomberg retail purchasing managers index showed on Jan. 6.

Germany's economy expanded an average 1.2 percent from 1993 to 2003, the same as Japan and less than half the pace in the U.S. and U.K. Before last year, the economy hadn't grown faster than 0.8 percent since 2000.

This year's growth ``isn't self-sustaining,'' said Bank of America's Schmieding. ``Unfortunately, it's too early for the labor market to pick up.''

With the recovery not yet strong enough to lower unemployment, the ECB will leave its benchmark interest rate at a six-decade low 2 percent when it meets today, all 31 economists in a Bloomberg survey said. The bank announced its rate decision at 1:45 p.m. in Frankfurt.

Investor Expectations

Investors are betting against the bank raising borrowing costs until the second half of the year, futures trading suggest. The yield on the June Euribor futures contract was 2.30 percent yesterday, down from 2.42 percent on Nov. 18.

The contracts settle to the three-month euro area inter-bank lending rate for the euro, which has averaged 15 basis points more than the ECB's key rate since the currency's start in 1999. That rate was 2.15 percent yesterday.

The euro's increase may weigh on exports this year as German goods and services become more expensive for buyers outside the 12 countries sharing the euro. The euro reached a record $1.3666 on Dec. 30 and traded at $1.3257 at 8:55 a.m. in Frankfurt.

``Export growth could deteriorate with the strong euro,'' said Holger Schmieding, co-head of European economics at Bank of America Corp. in London.

Bayerische Motoren Werke AG was among 14 of 23 German companies in a Bloomberg survey that said they could weather currency's gains. BMW Chief Executive Officer Helmut Panke said in an interview in Detroit this week that the world's second-largest maker of luxury cars will report record sales this year.

Consumer Reluctance

Consumer spending in Germany failed to grow in 2002 and 2003 as the number of jobless climbed to 4.48 million in December. Households haven't increased consumption more than 0.1 percent on a quarterly basis for more than two years.

``The biggest growth opportunities are outside Germany'' for companies such as Metro AG, Germany's largest retailer, said Kai- Oliver Mokrus, a fund manager at Deka Investment GmbH in Frankfurt in a Bloomberg television interview yesterday. ``German retail is in a crisis.''

Metro is pruning business in its home market. The company said yesterday fourth-quarter sales rose 6 percent as it expanded abroad. Its competitor KarstadtQuelle AG, which makes most of its sales in Germany, reported a 9.5 percent drop in sales.

Chancellor Gerhard Schroeder's government is cutting taxes in an effort to boost consumer spending and growth. In 2005, personal income taxes are being reduced by 6.5 billion euros ($8.6 billion). The government has also cut jobless benefits and made it easier for companies to fire people.

To contact the reporter on this story: Brian Swint in Frankfurt at bswint@bloomberg.net.

Last Updated: January 13, 2005 03:07 EST