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Domestic demand keeps Germany driving euro zone economy

An employee injects insulation into the door frame of a Porsche 911 luxury automobile on the assembly line at Porsche AG's factory, operated by Volkswagen AG, in Stuttgart, Germany in this file photo.

Krisztian Bocsi/Bloomberg

Strong household spending, rising state expenditure and higher company investments consolidated Germany's role as the euro zone growth engine in the second quarter, although accelerating imports meant growth came in just below expectations.

Seasonally and calendar-adjusted gross domestic product (GDP) rose by 0.6 per cent on the quarter, the Federal Statistics Office said on Tuesday. This was slightly weaker than the consensus forecast of 0.7 per cent in a Reuters poll.

But the growth rate for the first quarter was revised up to 0.7 per cent from 0.6 per cent, and the April-June expansion marked a 12th consecutive quarter of growth.

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"The German economy is proving its staying power, the upswing continues," Bankhaus Lampe economist Alexander Krueger said, adding that the European Central Bank's low interest rates were boosting the economy.

The Statistics Office said that growth in the April-June period was mainly driven by domestic demand as households and state authorities increased their spending and companies boosted investment in buildings and equipment.

But overall growth was dampened by net foreign trade since exports rose less strongly than imports, which the vibrant domestic economy sucked in at a higher rate.

RISKS AHEAD

"Germany's economic success story goes on and on and on," ING Bank analyst Carsten Brzeski said, adding there was very little reason to fear a sudden end to the current performance.

He cautioned, however, that the main drivers supporting the domestic economy, such as rising employment, rising wages and increased government spending, could lose some momentum in the coming quarters.

"The same holds for the export sector, where a stronger euro, weaker-than-expected U.S. growth and Brexit uncertainty could take some wind out of the sails without bringing exports to a halt," Brzeski said.

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Unadjusted data had the economy growing by 0.8 per cent on the year in the second quarter. This compared with a consensus forecast of 1.9 per cent. Adjusted for calendar affects, the yearly growth rate was 2.1 per cent in the April-June period.

The Statistics Office will publish its detailed GDP growth data on Aug. 25.

The data, coming less than six weeks before a federal election in which Chancellor Angela Merkel seeks to win a fourth term, underlines the continued strength of the German economy compared with its peers.

The French economy, the second-largest in the euro zone, grew 0.5 per cent in the second quarter, helped by stronger exports, according to preliminary data.

In Italy, the third-biggest economy in the 19-member bloc, the national central bank expects a quarterly expansion roughly in line with the first quarter's increase of 0.4 per cent. Preliminary data are due on Wednesday.

The Spanish economy keeps powering ahead, however, with a growth rate of 0.9 per cent in the April-June quarter.

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This was well above the euro zone average of 0.6 per cent, according to preliminary estimates released by the European Union's statistics agency this month.

Outside the euro zone, Britain's economic output grew by 0.3 per cent on the quarter, edging up from 0.2 per cent in the first three months.

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