By Michelle Martin

By Michelle Martin

 

BERLIN (Reuters) - Foreign trade drove a 0.6 percent expansion in Europe's largest economy between October and December, German data showed on Friday, and the momentum from the fourth quarter is widely expected to carry over into the start of 2018.

 

The data, which confirmed a preliminary reading, shows the German economy ended last year on a strong footing despite unaccustomed political uncertainty in a country that prides itself on its stability.

 

Germany is still awaiting a new government five months after an inconclusive election in September. Chancellor Angela Merkel's conservatives and the Social Democrats (SPD) have agreed to form a coalition but SPD members still have the chance to veto that deal in a ballot.

 

"The German economy continues to be in good shape," said Joerg Zeuner, chief economist at KfW state development bank. "Since 2014 it has been growing faster than the long-term trend and the strong upswing will continue this year and next."

 

He said the economy had performed well in the fourth quarter despite an unusually high number of public holidays and so-called bridge days, when Germans take an extra day off between public holidays and the weekend.

The Federal Statistics Office said exports, which have traditionally propelled the German economy, climbed by 2.7 percent on the quarter and imports rose by 2.0 percent so net trade contributed 0.5 percentage points to growth.

But private consumption, which has been a key pillar of support in recent years, was stagnant -- as was gross capital investment. Neither made any contribution to growth.

Government spending increased, adding 0.1 percentage points to growth.

The finance ministry expects the economic upturn to continue at the start of 2018 and Ifo chief Clemens Fuest has said business confidence levels pointed to a 0.7 percent expansion between January and March.

That is despite the specter of a new election hanging over Germany if the SPD's 464,000 members reject a coalition with Merkel. The result of the SPD ballot is due on March 4.

On Thursday, Ifo's monthly survey showed morale among businesses weakening in February but remaining at a high level overall even though a stronger euro weighed on the outlook for exporters. Other recent surveys have shown private sector growth slowing and investor sentiment deteriorating.

In a sign that household spending could pick up in the first quarter, consumer morale is at it highest since 2001, with Germans benefiting from record-high employment, strong job security, rising real wages and low borrowing costs.

The outlook is rosy according to Germany's central bank, the Bundesbank. It expects the economy to expand by a calendar-adjusted 2.5 percent this year -- the strongest rate of growth since 2011.

But there are numerous risks for the economy, KfW's Zeuner warned. He pointed to Britain's looming departure from the European Union, protectionist tendencies in the United States, increased volatility on financial markets and possible adverse effects from an unexpectedly strong euro.

(Reporting by Michelle Martin; Editing by Paul Carrel, Catherine Evans and Peter Graff)