German industrial production jumped by the most in more than six years in January, in a sign that strong domestic demand may be helping to underpin output even as external trade cools.

Production, adjusted for seasonal swings, climbed 3.3 per cent from the prior month after retreating a revised 0.3 per cent in December,  data from the Economy Ministry in Berlin showed on Tuesday.

That was the biggest increase since September 2009 and the first gain in three months. It was stronger than all projections in a Bloomberg survey of economists, which had a median forecast for 0.5 per cent growth.

While German consumers continue to spend robustly and investment and construction bounced back from December, manufacturers still face a number of challenges this year.

A China-led slowdown in emerging markets is slowing exports and market volatility has dealt a blow to business confidence and factory orders. "It is a good start for the German economy in the new year," said Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt. "We don't think that this will start a lasting uptrend." Solveen had the highest forecast for production in the Bloomberg survey, at 2 percent, but said a slowdown in emerging markets is among the factors tempering his outlook.

Mild weather probably helped construction in January, he added. ‘Moderate Recovery’ The euro barely budged when the data was released. It was up 0.2 percent at $1.1030 this morning.

Construction jumped 7 per cent from December and investment goods output rose 5.3 per cent, the report showed. Consumer goods production increased 3.7 percent and manufacturing increased 3.2 per cent. Industrial output rose 2.2 per cent from a year earlier, again beating the highest economist estimate. “After a weak spell in second half 2015, the manufacturing industry had a very good start in the new year,” the ministry said in a press release.

"Overall, a moderate recovery in industrial activity is expected in the first quarter." Companies may yet struggle to gain pricing power. Germany's inflation rate dropped to minus 0.2 per cent last month, the weakest figure in more than a year. Euro-area inflation was also minus 0.2 per cent. Economists and investors predict the European Central Bank will add fresh stimulus for the region when policy makers meet in Frankfurt on Thursday.

Bloomberg