German Growth Led by Domestic Demand as Investment Climbs

German economic growth was driven exclusively by domestic demand in the third quarter as investment and construction offset an export slowdown.

Capital investment rose 1.6 percent in the three months through September from the prior quarter and construction increased 2.4 percent, the Federal Statistics Office in Wiesbaden said today. The expansion in gross domestic product slowed to 0.3 percent from 0.7 percent, it said, confirming a Nov. 14 estimate.

Germany is relying more on its domestic economy as the euro area, its biggest export destination, struggles to sustain a nascent recovery. Growth in the 17-nation currency bloc almost stalled in the third quarter, as the French economy unexpectedly shrank and Italy extended a record-long recession.

“The investment surge was much stronger than we and consensus had expected and bodes well for an investment-led expansion next year as well,” said Christian Schulz, senior economist at Berenberg in London. Domestic demand “highlights Germany’s potential to continue to play a positive role in supporting the euro-zone crisis countries’ export-led recovery,” he said.

Net Trade

Gross domestic product grew 0.6 percent from a year earlier when adjusted for working days, today’s report showed. Government spending rose 0.5 percent from the prior quarter and private consumption gained 0.1 percent. Total domestic demand added 0.7 percentage point to GDP, while net trade subtracted 0.4 percentage point. Exports rose 0.1 percent while imports climbed 0.8 percent.

Germany’s increased reliance on its home economy may counter criticism from the International Monetary Fund and the U.S. Treasury, which have said the nation is hampering European and global growth by focusing too heavily on exports. European Union regulators said on Nov. 13 they started a probe of Germany’s trade surplus.

The German Economy Ministry rejected the criticism on Oct. 31 as “not justified” and Chancellor Angela Merkel said in Berlin yesterday that it would be “absurd” to to try make German companies reduce production or cut back on quality.

The Bundesbank said in its monthly report on Nov. 18 that Europe’s largest economy is on a “solid” path that points to it growing according to its potential.

Ifo Index

German business confidence rose more than expected in November, with the Ifo institute’s business climate index, based on a survey of 7,000 executives, increasing to 109.3 from 107.4 in October. Manufacturing activity surged to the highest in almost 2 1/2 years this month, an index by London-based Markit Economics showed yesterday.

Economists forecast an expansion of 0.4 percent in the final three months of this year, while the European Commission predicts growth of 0.5 percent this year. By contrast, the commission forecasts the euro-area economy will shrink 0.4 percent in 2013.

The European Central Bank, which cut its benchmark interest rate to a record low of 0.25 percent this month, will publish economic forecasts on Dec. 5. The ECB has said that support from monetary policy will remain in place for as long as necessary to counter slowing inflation, which was the weakest in four years in October.

“The euro zone still faces a hard slog in developing the recovery and remains vulnerable to setbacks,” said Howard Archer, chief European economist at IHS Global Insight in London. “The hope for the euro zone has to be that a combination of recent steadily rising confidence, ultra accommodative monetary policy, very low inflation and reduced fiscal tightening will fuel a gradual recovery.”

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