Aerial photo shows the main railway station Hauptbahnhof in Berlin, Germany, May 29, 2016. Picture: REUTERS/ HANNIBAL HANSCHKE
Aerial photo shows the main railway station Hauptbahnhof in Berlin, Germany, May 29, 2016. Picture: REUTERS/ HANNIBAL HANSCHKE

Frankfurt — Germany’s economy looks to have found its feet again after an apparent shaky start to the year, suggesting some of the worries about the outlook may have been overdone.

Delivering on its role as driver of the region’s expansion once again, it recorded growth of 0.5% in the three months through June — better than forecast — and its first-quarter performance was revised higher. That keeps solid momentum in the eurozone’s largest economy, even as companies navigate persistent trade tensions.

The euro rose after the report and traded at $1.1426 at 10.05am in Frankfurt. Germany’s benchmark DAX 30 was up 0.7%.

While solid domestic demand in Europe’s largest economy has shielded the region from the worst effects of global trade tensions, so far, companies are increasingly concerned about the outlook. New numbers in China hint at a mid-year rough patch for growth, and there’s also turmoil in Turkey that’s sent the lira down 40% this month and spread to other emerging markets.

Germany’s statistics office said second-quarter growth was bolstered by an increase in private and government spending. Equipment investment and construction gained "somewhat", while imports rose stronger than exports.

"The data is a testament to the strength of the domestic economy, but it shouldn’t be read as a sign that the German economy is completely insulated from the external threats still looming," said Oliver Rakau, chief German economist at Oxford Economics in Frankfurt. "It’s more a question of when they’ll really hit."

Trade threats

The spectre of a trade war still looms large, even after the EU and the US pledged not to introduce new levies as long as negotiations to lower trade barriers are ongoing. The European Central Bank (ECB) said last week that if all threatened measures are implemented, the average US tariff rate would rise to levels not seen for 50 years.

Carmakers, including Volkswagen (VW), Daimler and BMW, have warned against the fallout from increased trade tensions. Some other German companies have expressed optimism. HeidelbergCement confirmed its outlook for 2018, even after negative currency effects dampened second-quarter revenue, and cargo container shipping company Hapag-Lloyd predicted a better second half and said trade tensions haven’t yet left a mark on business.

German data come after the eurozone’s second-and third-largest economies disappointed in the second quarter. French growth unexpectedly failed to accelerate, after a series of national strikes dragged output down. Italy’s expansion slowed to the weakest in almost two years.

Dutch growth exceeded expectations with a pickup to 0.7%. The Slovak economy grew an annual 4.1% in the second quarter. Eurostat will update its estimate for the eurozone on Tuesday when industrial-production data for June will also be available.

Building momentum

Signs have increased recently that momentum in Germany’s economy is building. Surveys of private-sector business activity have risen for the past two months, and the Bundesbank has said it sees a slight pickup on the back of private consumption.

At the same time, factory orders — a gauge of future output — showed the first annual decline in almost two years in June, the month before the US and the EU agreed to work towards a trade accord.

Investor confidence in August will indicate whether the deal stabilised economic prospects, after sentiment slid last month to the lowest since 2012. The Centre for European Economic Research (ZEW) will publish indices for Germany and the eurozone at 11am Frankfurt time.

"The second-quarter print shows the German economy has withstood the trade tensions fairly well," said Florian Hense, an economist at Berenberg in London. "As German exporters get used to the noise, realise that business keeps coming in at a healthy pace, and the US and the EU get their trade deal, the fear factor should fade and the business environment could turn calmer again."

With assistance from Kristian Siedenburg, Harumi Ichikura and Andre Tartar

Bloomberg