By Michael Nienaber and Balazs Koranyi
BERLIN/FRANKFURT (Reuters) - German economic growth is likely to slow after a robust start to the year, expanding at a slower pace for the rest of 2016 as foreign trade cools, the Finance Ministry and central bank said on Monday.
Europe's largest economy grew 0.7 percent between January and March, its strongest quarterly rate in two years, as soaring private consumption, higher construction investment and state spending on migrants more than offset weak foreign trade.
The government expects domestic demand to drive an overall economic expansion of 1.7 percent in 2016, on a par with last year.
In its monthly report, the Bundesbank said economic growth is likely to slow sharply in the second quarter before rebounding later in the year. The Finance Ministry took a slightly more positive view of the March-June period.
"The German economy had a good start to the second quarter," the ministry said in its monthly report.
"Economic indicators overall suggest a continuation of the economic upswing, albeit at a less dynamic pace than at the beginning of the year."
Rising employment, higher wages and low interest rates are boosting the purchasing power of German consumers, the ministry said, adding: "Altogether, the conditions for private consumption remain good."
The central bank said growth would dip compared to the first quarter due to lower industrial export orders and fluctuations in the construction sector and as the positive impact of a relatively warm winter wears off.
With its 0.7 percent expansion, Germany was the driver of an unexpectedly robust first quarter for the euro zone, with strong investments and healthy industrial output suggesting the bloc was on an upswing.
"The positive sentiment indicated by corporate and household surveys suggests that economic growth after a weak second quarter should increase again over the next six months," the Bundesbank said.
Despite the second quarter dip, it still expects full year growth of 1.7 percent, in line with last year's figure, supporting the European Central Bank's view that its extraordinary stimulus is adding to growth and reviving inflation.
The Finance Ministry said strong domestic demand was pushing up tax income, with overall revenues up nearly 6 pct on the year in first five months of 2016.
Buoyant tax revenues were enabling Finance Minister Wolfgang Schaeuble to increase spending on migrants and infrastructure while keeping a balanced budget.
The ministry said exports were still growing thanks to strong demand from European Union countries which was cushioning the effect of weaker demand from emerging markets such as China, Brasil and Russia.
"Nevertheless, trade-related risks remain, especially with regard to the still sluggish development of the world economy," it added.
(Editing by Robin Pomeroy)