German consumer sentiment is set to improve in July, as rising income and household spending will continue to spur growth in Europe’s largest economy despite growing fiscal mess in the Eurozone, the latest survey results from the market research group GfK showed on Tuesday.

GfK said that its forward-looking consumer confidence index for July rose to 5.8 from 5.7 in June, defying economists' expectations for a decline to 5.6 in July.

The increase comes on the back of rising employment and wages in Germany’s surprisingly robust labor market.

The indicator for income expectations for June jumped by 8.1 points to 40.1 points from 32.0 points in May.

However, GfK warned that the longer-term outlook is not so rosy.

Germany cannot be immune to the negative impact of external risks such as the raging eurozone debt crisis and the region’s economic downturn, Gfk said.

“Growing uncertainty due to the escalating eurozone debt crisis, intense debate of a possible Greek exit from the single currency, and the crisis in the Spanish banking sector could in time also have a greater impact on German consumers,” GfK said.

If confidence drops, spending will fall with it, Gfk said.

"There is a growing concern that Germany could also be drawn into the escalating downward trend,” GfK said.

While GfK’s overall consumer climate index refers to the following month, its sub-indexes - economic expectations, income expectations and buying propensity - refer to the current month.

Following three months of steady increases, German consumers’ expectations for economic developments worsened sharply in June to a level last seen in December 2011, when the German economy was shrinking.

The economic expectations index dived to 3 points in June from 19.6 in May.

Germans regard the external risks as being a threat to the economy in general, rather than to their personal financial conditions, GfK said.

The propensity to buy index rose slightly, to 32.7 points in June from an already high level of 32 in May.

GfK maintained the forecast it made at the start of 2012 that German private consumption will rise by ~1% this year in inflation-adjusted terms.