German economy had decent start to secong quarter, but growth to slow, ministry says

By Michael Nienaber

BERLIN (Reuters) – The German economy had a decent start to the second quarter but its growth pace is likely to slow during the course of the April-June period, the economy ministry said on Friday.

Europe’s largest economy was on a solid growth path, the ministry said in its monthly report, but the external environment remained tough and was only gradually improving.

It said private consumption remained the most important driver of growth.

“After the positive start to 2016, German economic growth is likely to slow somewhat in the second quarter, not least because the spring recovery in construction is likely to be less pronounced than usual after the mild winter,” the ministry added.

The German economy expanded by 0.7 percent on the quarter in the January-March period, with strong private consumption, higher construction investment and increased state spending on refugees more than offsetting a dip in foreign trade.

For 2016 as a whole, the government expects gross domestic product (GDP) to expand by 1.7 percent, on a par with last year, when growth was driven mainly by soaring household expenditure and higher state spending.

The purchasing power of German consumers is currently being boosted by record high employment, rising real wages, rock-bottom borrowing costs and nearly stable prices.

In May, consumer prices — harmonised to compare with other European countries (HICP) — were unchanged on the year after falling by 0.3 percent in April, the Federal Statistics Office said on Friday, confirming preliminary estimates. [B4N15B02J]

The ministry said the strong influx of refugees was still only having a moderate impact on the labour market, but this would change in the future.

Analysts expect German unemployment to rise next year when a growing number of asylum seekers will enter the labour market.

The government plans to spend nearly 10 billion euros ($11.3 billion) this year on supporting and integrating a record influx of more than 1 million migrants who arrived in Germany last year alone. Berlin also aims to spend more than 6 billion euros on combating the causes of migration from the Middle East and elsewhere.

The total sum of some 16 billion euros is expected to rise in coming years, with Berlin planning to spend 93.6 billion euros overall by 2020 while keeping a balanced budget. On top of this comes several billion euros of spending on migrants by the federal states and municipalities.

(Reporting by Michael Nienaber and Michelle Martin)