An index measuring German consumer confidence for December, showed that optimism about the economy's future and expectations of rising incomes hit highs not seen in several-years, forecasting a demand-driven holiday season in Europe’s largest economy.

The GfK consumer climate report, published on Wednesday, showed that the forward-looking index, which measures the level of consumer confidence in economic activity, rose sharply to 7.4 for December, against analysts' predictions that the index would remain steady at November’s upwardly revised 7.1 number.

“The apparent trend towards recovery of the German economy has not gone unnoticed among consumers. Both economic and income expectations rose sharply upwards,” GfK said in a statement, noting that “willingness to buy also improved again from its already extremely high level, partly stimulated by the European Central Bank lowering interest rates.”

The report, which is compiled from a survey of about two thousand consumers and asks respondents to rate the relative level of past and future economic conditions, showed a steady uptick in consumers' willingness to spend with the index rising 1.3 points to 45.7 -- a 7-year-high -- in December.

Confirming its earlier forecast that private spending in Germany will increase by about 1 percent in real terms in 2013, GfK said: “Consumption will register clear above-average increases.”

After falling for the past three months, income expectations shot up by 12.5 points to 45.2 -- a 12-year-high. Meanwhile, the economic expectations sub-index improved for the third consecutive month and rose 9 points to a two-year-high of 20.3 in December.

“The emerging signs of a recovery in the German economy are also causing employment to increase again, albeit moderately. In turn, this is ensuring that incomes will also record considerable growth rates, which are very likely to be above the expected rate of inflation and will therefore result in real income increases for private households,” Gfk said.