August 14, 2018 / 6:20 AM / 4 months ago

'Alive and kicking' - German economy shifts into higher gear

BERLIN (Reuters) - The German economy picked up more pace than expected in the second quarter, driven by higher household and state spending, suggesting that it is powering ahead despite the threat of a major trade dispute with the United States.

FILE PHOTO: The Frankfurt skyline with its financial district is photographed in the early evening in Frankfurt, Germany, March 25, 2018. REUTERS/Kai Pfaffenbach/File Photo

Gross domestic product rose 0.5 percent quarter-on-quarter in April-June, the Federal Statistics Office said on Tuesday, beating economists’ consensus forecast of 0.4 percent in a Reuters poll.

The office also revised up the quarterly growth rate for the first three months of the year to 0.4 percent from 0.3 percent.

Fears of a full-blown trade war between the European Union and United States deepened during the second quarter. However, these eased last month after U.S. President Donald Trump met European Commission President Jean-Claude Juncker.

In a further positive sign, German investor morale improved more than expected in August following the Washington meeting, the ZEW institute said.

“Despite all of the prophecies of doom, the upswing is not only alive, it’s also kicking,” Bankhaus Lampe economist Alexander Krueger said. “For the time being, the upswing is unlikely to be stalled by the global trade dispute or overheating.”

The German economy ministry and ZEW researcher Achim Wambach both cautioned, however, that Germany’s growth outlook remained clouded by Trump’s tariff threats.

The government forecast 2.3 percent economic growth this year and 2.1 percent for next. This would be well above Germany’s average pace of the past 10 years.

STRONG IMPORTS

On the year, the German economy grew by 2.0 percent from April to June, calendar-adjusted data showed. Analysts polled by Reuters had expected a 2.1 percent expansion.

The Statistics Office said economic growth was mainly driven by higher household spending and increased state consumption. Additional impetus came from investments.

Exports also grew but were outperformed by even stronger imports, suggesting that net trade did not contribute to overall economic growth, the office said.

The figures underpin a gradual shift in the German economy away from its traditional export-oriented growth towards a more domestically driven upturn, propelled by record-high employment, rising wages and booming construction.

“Contrary to the national football team, the German economy did not have a rude awakening at the start of the summer,” ING analyst Carsten Brzeski said, referring to the side’s early exit from the World Cup. “Instead, the economy has returned as an outperformer of the euro zone.”

Following the stronger-than-expected German growth figures, euro zone GDP growth was revised up to 0.4 percent in the second quarter, supporting perceptions of steady growth despite increased trade tensions in the April-June period.

A separate release from the German statistics office showed consumer inflation, harmonised to make it comparable with other euro zone data, remained at 2.1 percent on the year in July.

Slideshow (5 Images)

It was the third month in a row that German headline inflation exceeded the European Central Bank’s price stability target of close to but below 2 percent for the whole bloc.

“The upward revision to euro zone GDP growth in Q2 will make policymakers at the ECB more confident that they are right to be winding down their asset purchases,” Jack Allen from Capital Economics said.

The ECB plans to wrap up its unprecedented 2.6 trillion euro stimulus programme by the end of the year, but to keep interest rates at record lows through the summer of 2019.

Reporting by Michael Nienaber; Editing by Michelle Martin, Catherine Evans and David Stamp

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