German Growth Quickens as Domestic Strength Beats Trade Risk

(Bloomberg) -- Germany’s economy looks to have found its feet again after an apparent shaky start to the year, suggesting some of the worries about the outlook may have been overdone.

Delivering on its role as driver of the region’s expansion once again, it recorded growth of 0.5 percent in the three months through June -- better than forecast -- and its first-quarter performance was revised higher. That keeps solid momentum in the euro area’s largest economy even as companies navigate persistent trade tensions.

German Growth Quickens as Domestic Strength Beats Trade Risk

The euro rose after the report and traded at $1.1426 at 10:05 a.m. Frankfurt time. Germany’s benchmark DAX Index was up 0.7 percent.

While solid domestic demand in Europe’s largest economy has shielded the region so far from the worst effects of global trade tensions, companies are increasingly concerned about the outlook. New numbers in China hint at a mid-year rough patch for growth, and there’s also turmoil in Turkey that’s sent the lira down 40 percent this month and spread to other emerging markets.

Germany’s statistics office said second-quarter growth was bolstered by an increase in private and government spending. Equipment investment and construction gained “somewhat.” Imports rose stronger than exports.

“The data are a testament to the strength of the domestic economy, but it shouldn’t be read as a sign that the German economy is completely insulated from the external threats that are still looming,” said Oliver Rakau, chief German economist at Oxford Economics in Frankfurt. “It’s more a question of when they’ll really hit.”

Trade Threats

The specter of a trade war still looms large, even after the European Union and the U.S. pledged not to introduce new levies as long as negotiations to lower trade barriers are ongoing. The ECB said last week that if all threatened measures are implemented, the average U.S. tariff rate would rise to levels not seen for 50 years.

Carmakers including Volkswagen AG, Daimler AG and BMW AG have warned against the fallout from increased trade tensions. Some other German companies have expressed optimism.

HeidelbergCement AG confirmed its outlook for 2018 even after negative currency effects damped second-quarter revenue, and cargo container shipping company Hapag-Lloyd AG predicted a better second half and said trade tensions haven’t yet left a mark on business.

What Our Economists Say...
“The rebound, together with a small upward revision to 1Q growth, are consistent with only a modest amount of momentum having been lost in 1H18.”

--Jamie Murray, chief Europe economist, Bloomberg Economics

For more, see our Germany React

German data come after the euro area’s second and third-largest economies disappointed in the second quarter. French growth unexpectedly failed to accelerate, after a series of national strikes dragged down output. Italy’s expansion slowed to the weakest in almost two years.

Dutch growth exceeded expectations with a pickup to 0.7 percent. The Slovak economy grew an annual 4.1 percent in the second quarter. Eurostat will update its estimate for the euro area at 11 a.m., when industrial-production data for June will also be available.

Building Momentum

Signs have increased recently that momentum in Germany’s economy is building. Surveys of private-sector business activity have risen for the past two months, and the Bundesbank has said it sees a slight pickup on the back of private consumption.

At the same time, factory orders -- a gauge of future output -- showed the first annual decline in almost two years in June, the month before the U.S. and the European Union agreed to work toward a trade accord.

Investor confidence in August will indicate whether the deal stabilized economic prospects, after sentiment slid last month to the lowest since 2012. ZEW will publish indexes for Germany and the euro area at 11 a.m. Frankfurt time.

“The second-quarter print shows the German economy has withstood the trade tensions fairly well,” said Florian Hense, an economist at Berenberg in London. “As German exporters get used to the noise, realize that business keeps coming in at a healthy pace, and the U.S. and the EU get their trade deal, the fear factor should fade and the business environment could turn calmer again.”

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