German economy powers ahead, but exports cloud picture

By Joseph Nasr

BERLIN (Reuters) - Germany more than doubled its economic growth rate in the first quarter as higher state and household spending more than offset a fall in exports, the Federal Statistics Office said on Friday.

The economy grew by 0.7 percent, the highest quarterly rate since an identical reading in the first quarter of 2014.

That beat the rate of 0.6 percent registered across the euro zone, cementing Germany's position as the bloc's economic engine. A Reuters poll had forecast that figure for Germany alone.

Milder winter weather in Germany prompted a rise in investment on construction and capital goods, the statistics office said.

Private consumption has overtaken trade as the most important growth driver for the German economy, with record-low unemployment, low interest rates and higher wages pushing consumers to spend more.

Also on Friday, Germany's biggest trade union, IG Metall, said it agreed with employers on a two-stage wage increase of 4.8 percent over 21 months.

Economists link the rise in consumption as well as a booming real estate sector mainly in urban centres to the European Central Bank's ultra-loose monetary policy, which has been criticized in Germany.

The quarterly growth rate easily beat the 0.3 percent posted in the final three months of 2015, though the unadjusted year on year figure of 1.3 percent missed the Reuters consensus forecast of 1.5 percent.

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The economy ministry said it expected German growth to slow, a view shared by economists, who said the impact of weaker exports would eventually be felt as demand from emerging markets slows.

"Trade remains the problem child because of weakness in emerging markets," said Sal. Oppenheim economist Ulrike Kastens.

Holger Sandte of Nordea added: "Growth will not remain so strong, but strong enough so employment continues to rise."

Economy Minister Sigmar Gabriel said the government should increase investment on education, infrastructure and innovation, echoing calls by the International Monetary Fund (IMF).

"The German economy started 2016 on a good footing: industry posted an increase in production, employment is noticeably rising, and higher income of private households is leading to higher private spending," Gabriel said.

"Our task is to use this momentum to invest in education, modern infrastructure and innovation."

But ING economist Carsten Brzeski said the strong data would provide more ammunition for German politicians to resist calls by the IMF and the Organisation for Economic Co-operation and Development (OECD) to reform the economy.

The IMF and OECD have urged Germany to boost investment, and reform its labour market and pension system, while as the OECD called for tax reductions.

"The strong growth performance also shows what currently is the biggest risk for the German economy: complacency," Brzeski said.

"With growth driven by construction and consumption and a government which is reluctant to follow up on international advice to implement structural reforms, the German economy has almost started to resemble peripheral (euro zone) characteristics."

(Additional reporting by Michael Nienaber and Gernot Heller; editing by John Stonestreet)