German economy beats forecasts to grow by 0.7 percent in second quarter

BERLIN (Reuters) – The German economy grew by its strongest rate in more than a year in the second quarter, beating forecasts and suggesting that Europe’s largest economy will haul the euro zone out of recession, preliminary data showed on Wednesday.

The economy expanded by 0.7 percent, seasonally-adjusted figures from the Statistics Office showed. It was more than the median forecast in a Reuters poll of economists for expansion of 0.6 percent and was the biggest quarterly rise since the first quarter of 2012.

German growth was largely driven by an increase in domestic private and public consumption and came after the economy only narrowly avoided a recession earlier this year.

“At least for the time being, the German economy has returned as the big stronghold, not only for the euro zone but this time around even for the global economy,” said Carsten Brzeski, senior economist at ING.

“For the euro zone, this morning’s numbers are also good news. Thanks to Germany, the entire euro zone should have left the record-long recession,” he added.

Gross domestic product in the euro zone as a whole is forecast to rise by 0.2 percent, ending a recession that took hold in late 2011, according to a Reuters poll. It is due to be published at 0900 GMT (4:00 a.m. EDT).

The better-than-expected Q2 figure, released five weeks before a federal election, will be welcome news for Chancellor Angela Merkel who is seeking a third term in the vote on September 22. Her government expects growth of 0.5 percent this year.

While the German economy steamed ahead during the early years of the euro zone crisis, it slowed last year and even contracted in the fourth quarter as exports languished and investment was sluggish.

But investments picked up significantly between April and June, largely due to weather-related catch-up effects after an unusually long and cold winter, while net exports also made a positive contribution to growth, the Statistics Office said.

Economists warned that weak investments remained a challenge for the economy. German firms have also been downbeat about export prospects during the current earnings season. Synthetic rubber maker Lanxess (LXSG.DE ), for example, warned of fragile sentiment in markets like China and Brazil as well as Europe.

Corporate results have been a mixed bag. Of Germany’s 30 biggest companies, just over a third reported second-quarter financial results that missed analyst expectations, while fewer than a third beat consensus.

The Statistics Office revised downwards the figure for the first quarter of 2013 to show stagnation of 0.0 percent. It had originally reported an expansion of 0.1 percent.

The figure chimed with a recent slew of largely upbeat data from Germany. Industry orders and output have surged, the private sector has expanded, exports have risen, unemployment has fallen and sentiment surveys have been more optimistic.

(Reporting by Michelle Martin- Additional reporting by Alexandra Hudson in Berlin and Maria Sheahan in Frankfurt- Editing by Stephen Brown)