By Michael Nienaber
BERLIN (Reuters) - Strong demand from euro zone countries and domestic customers drove a bigger-than-expected rise in German industrial orders in August, suggesting factories will contribute to growth in Europe's economic powerhouse in coming months.
The surprisingly strong data, published by the Economy Ministry on Thursday, gave some relief after a batch of weak figures in July had raised concern that the German economy could be heading towards a sharp slowdown in the second half.
"Finally good news from industrial orders," VP Bank analyst Thomas Gitzel said, adding that continued strong demand from euro zone countries signaled a broader recovery in the bloc.
In a further positive sign for Germany's economic outlook, the BDI industry association raised its forecast for GDP growth this year to 1.9 percent from previously 1.7 percent.
Speaking at a BDI event in Berlin, Chancellor Angela Merkel said the economy was in a good shape and employment was rising, allowing for some fiscal flexibility while sticking to the government's goal of no new debt.
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"The good budgetary situation is having a positive effect. We will be able to bring about small tax relief, which will amount to 6 billion euros for 2017 and 2018," Merkel said.
Merkel defended her controversial strategy to keep the budget balanced, a cornerstone in the election campaign of her conservatives ahead of next year's federal vote and a goal also known as the 'Schwarze Null' or black zero.
"I think solid fiscal policy is important also because of the demographic changes we're facing. The 'Schwarze Null' is not a fetish of uninspired people as some critics suggest, but it is the statement that we don't want to burden the next generation with even more new debt," Merkel said.
Speaking at the same BDI event, Economy Minister Sigmar Gabriel said more investment in infrastructure, schools and fast internet were needed to ensure Germany remained competitive.
Gabriel's Social Democrats, junior partner of the conservatives in the ruling coalition, have made boosting investments their election platform.
He added that given oil prices are expected to rise and dent private consumption, it made more sense for Germany to invest in its future rather than spend the budget surplus on tax cuts, a subtle criticism of the conservatives' election promise.
Contracts for goods 'Made in Germany' were up by 1.0 percent on the month, the industry data showed. That was the highest reading since March and far better than a Reuters consensus forecast for a rise of only 0.2 percent.
Domestic demand rose by 2.6 percent while foreign orders inched down. However, demand from euro zone countries rose by 4.1 percent, nearly offsetting a drop of 2.8 percent of contracts from outside the common currency bloc.
A rise in July was revised up a touch.
"Overall, the latest data point to a light upturn in the industrial sector over the rest of the year," the ministry added. Ifo's business sentiment survey and Markit's purchasing manager index for factories both improved in September.
After having grown by 0.7 percent in the first quarter and 0.4 percent in the second, the Germany economy is widely expected to lose some steam in the second half, hampered by sluggish demand from Asia and the United States.
Still, leading economic institutes last week raised their 2016 growth forecast to 1.9 percent, which would be the strongest rate in five years, mainly driven by soaring private consumption and higher state spending on migrants.
The government will update its own growth forecasts for 2016 and 2017 on Friday. It predicts a 1.7 percent expansion this year and 1.5 percent next year.
"While some people threw in the towel regarding German growth in the second half of the year, the wind has turned now," Gitzel said. "Perhaps the recently improved forecasts for German growth are still a bit too conservative."
Others struck a more cautious tone. "One swallow does not make a summer," Commerzbank economist Ralph Solveen said on the rise in industrial orders in August, adding that the overall trend in the sector remained rather negative.
(Editing by Toby Chopra)