By Alexandra Hudson
BERLIN (Reuters) - Germany grew by a much stronger than expected 0.7 percent in the fourth quarter of 2014, with domestic demand lifting Europe's largest economy out of its mid-year lull to take growth for the whole year to 1.6 percent and raise hopes of a strong 2015.
Quarterly GDP beat not only the consensus forecast for 0.3 percent in a Reuters poll, but also all individual estimates. The overall growth rate for 2014 overshot the Statistics Office's January estimate of 1.5 percent.
"This is a thunderbolt. Economic recovery in Germany started much earlier than expected. Some spoke of possible recession after the summer but instead Germany rebounded. The fact that the growth comes mainly from the domestic economy gives strong grounds for optimism," said economist Andreas Rees at Unicredit.
"Thanks to 2014's strong finish we have a higher chance of seeing stronger-than-expected growth this year, which would help the rest of the euro zone."
Unadjusted data showed the economy grew by 1.6 percent on the year in the fourth quarter, also far exceeding the consensus forecast in a Reuters poll for 1.0 percent growth. Third-quarter data growth was confirmed at a previously reported 0.1 percent.
"Compared to the previous quarter positive momentum came mostly from the domestic economy. Private households in particular increased spending again significantly," the Statistics Office said.
With annual inflation at more than five-year lows, falling oil prices and low interest rates, Germans are preferring to spend rather than save. Firms also looked to have shrugged off mid-year uncertainty about global political events such as the Ukraine crisis to invest again.
After a strong start to 2014 the German economy just dodged recession in the middle months of the year, before the hoped-for recovery began to take hold at the end of 2014. The government recently forecast annual growth in 2015 of 1.5 percent.
The Statistics Office said the statistical overhang for 2014 stands at 0.5 percent.