16/08/2018 08:12 AST

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.

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

The office also revised up the quarterly growth rate for the first three months of the year to 0.4% from 0.3%. 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 US 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% economic growth this year and 2.1% for next. This would be well above Germany’s average pace of the past 10 years. On the year, the German economy grew by 2.0% from April to June, calendar-adjusted data showed. Analysts polled by Reuters had expected a 2.1% 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 eurozone.” Following the stronger-than-expected German growth figures, eurozone GDP growth was revised up to 0.4% 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 eurozone data, remained at 2.1% on the year in July.

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% for the whole bloc.

“The upward revision to eurozone 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 €2.6tn stimulus programme by the end of the year, but to keep interest rates at record lows through the summer of 2019.


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