German business confidence rose in May as companies become increasingly optimistic about the outlook for Europe's biggest economy, the Ifo economic institute said on Wednesday. 

The Ifo institute's closely-watched business climate index increased to 107.7 points in May from 106.7 points in April, Ifo said in a statement. 

Analysts had been expecting a much more modest increase in the index this month.

"The German economy is growing at a robust pace," said Ifo president Clemens Fuest.

"Companies are significantly more satisfied with their current business situation. In addition, they are noticeably more optimistic with regard to the coming months." 

Ifo calculates its headline index on the basis of companies' assessments of the current business environment and the outlook for the next six months.

The sub-index measuring current business increased by one point to 114.2 points and the outlook sub-index climbed by 1.1 point to 101.6 points, the institute said.