German Economy Beats Forecasts, Heads for Best Year Since 2011

(Bloomberg) -- German growth steamed ahead in the third quarter, keeping Europe’s largest economy on track for its best year since 2011.

The 0.8 percent jump in gross domestic product was an acceleration from the previous three months and topped the 0.6 percent median forecast in a Bloomberg survey. The expansion was driven by exports and capital investment, and net trade made a positive contribution.

German Economy Beats Forecasts, Heads for Best Year Since 2011

The report confirms the Bundesbank’s prediction that the economy carried its strong growth momentum into the second half. That expansion is bolstering the euro area’s upturn and supporting the global outlook, though it also means Germany is potentially straining against its maximum capacity, with repercussions for inflationary pressures.

“You can feel the German economy is really humming along,” Holger Sandte, chief European analyst at Nordea Markets in Copenhagen, said before the release. “We are looking at a pretty robust picture so that raises the question: where is the speed limit?”

The euro strengthened after the release and traded 0.2 percent higher on the day at $1.1688 at 8:27 a.m. in Frankfurt. The single currency also advanced against the pound.

While Germany has long been an engine of expansion for the euro area thanks to robust domestic demand and striving exports, the rest of the region is catching up. Differences in growth rates between member states have shrunk to the smallest in the region’s history, and the European Commission said last week that the 19-nation region will grow this year at its fastest pace in a decade.

GDP in the bloc increased 0.6 percent in the third quarter, according to an early estimate, which Eurostat will update at 11 a.m. Luxembourg time. The Netherlands economy grew 0.4 percent in the period, slowing from a 1.5 percent pace in the previous three months.

ECB Credit

The European Central Bank is taking credit for putting the economy back on its feet after a sovereign-debt crisis produced record unemployment and near-deflation, and threatened the survival of the currency union. Vice President Vitor Constancio said Monday that policy makers have been “highly successful” in driving the recovery with interest-rate cuts and stimulus programs.

His Executive Board colleague Benoit Coeure argued that the region’s upswing is probably the strongest in almost two decades in terms of “robustness and balance,” creating scope for structural reforms that would come as policy makers scale back monetary stimulus.

The appetite for such measures is currently being tested in Germany, where Chancellor Angela Merkel entered the final stretch of preliminary talks to form a new government, with factions in the complex multi-party negotiations remaining far apart.

Any decisions taken by the future coalition partners on whether to cut taxes or funnel more money into education and digital infrastructure will impact Germany’s growth prospects. The rate of economic expansion over the next two years looks set to exceed the pace that’s sustainable in the long term.

“As cumbersome and as difficult as the coalition talks in Berlin are currently are, spending more money in our view remains the easiest-to-agree-on common denominator for any next German government,” Carsten Brzeski, chief economist at ING-Bank AG said in a note. ‘‘There are plenty of ingredients for another extension of the current golden cycle.”

(An earlier version of this story removed an incorrect size and scope in second paragraph.)

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