Germany recorded surprisingly strong growth in the second quarter on the back of exports and domestic demand, data showed Friday, prompting observers to raise their forecasts for Europe's biggest economy.

Gross Domestic Product (GDP) expanded by 0.4 percent in calendar- and seasonally-adjusted terms between April and June, twice as much as forecasted by analysts surveyed by Factset.

The pace of growth was slightly slower than the previous quarter's 0.7 percent, a statement from federal statistics office Destatis said, but on a year-on-year basis, the expansion reached 3.1 percent -- "stronger than at any time in the past five years".

Demand for exports rose compared to the first three months of the year, while "private consumption spending and state consumption spending also bolstered growth," the statistics office said.

Rising income over the last year has boosted household consumption, while federal spending has also surged as Germany plays host to 1.1 million asylum seekers who arrived in the country last year.

Holger Schmieding, an analyst at Berenberg bank, said: "Germany's economic position continues to look strong."
He pointed to "solid domestic fundamentals, a buoyant labour market, rising real incomes, a modest fiscal stimulus and excellent financing conditions," which he believes would help Germany weather the fallout from Brexit. 

Andreas Rees of Unicredit suggested that Germany could see growth of 1.8 or 1.9 percent over the whole year rather than the 1.6 percent he had previously predicted, while Commerzbank's Joerg Kraemer also lifted his forecast from 1.5 percent growth to 1.8 percent for 2016.

Official estimates from the Bundesbank (central bank) and the federal government foresee growth of 1.7 percent for the year after 1.5 percent growth last year.

First-quarter growth had largely been powered by the domestic economy as good weather favoured construction in particular.

But there had been fears that a slowing global economy, geopolitical risks and weakness in China could take the wind out of German sails by decreasing foreign demand for its goods -- which bring in around 100 billion euros every month.

Friday's data suggests that cars, chemicals and machine tools continued to sell well abroad in the second quarter.

"Preliminary estimates showed exports increased compared with the first quarter of 2016," Destatis said, although detailed results will not be released until August 24.

"Household spending and state consumption spending also bolstered growth," the statement went on.

-Brexit questions-

But there were some weaker spots in the overall picture.

"Growth was slowed by weak net investment, especially in facilities and construction, where less was invested after a strong first quarter," the statisticians said.

The construction sector had shown strong growth during winter as Germany enjoyed unseasonably mild temperatures.
Bad weather in the second quarter put the brakes on building as powerful storms swept the country.

Some economists warned that the rest of the year will likely be weaker than the strong first half.

ING Diba bank's Carsten Brzeski said "the current recovery is clearly running on its very last leg," pointing to weak investments which he argues are unlikely to return to healthy levels given the shock of the UK's vote to quite the European Union, as well as fears of a wider global slowdown.

Economics think-tank DIW forecast on Wednesday that Brexit-related uncertainty would slash 0.4 percent from German growth by the end of the year as it weighs on performance across Europe.

With exports weakened, domestic consumption alone without investment will not be able to maintain growth indefinitely, Brzeski said.

But Commerzbank's Kraemer countered that Brexit fears were exaggerated.

"Factors much more important to the German economy than the Brexit are the declining demand from China and the strong domestic consumption," he wrote.

"These opposing influences should continue to largely balance each other out."

Source: AFP