Growth in Germany Tops Five-Year High in Second Quarter

The German economy, the biggest in the 12-country euro zone, is growing at its fastest rate since the dot.com boom five years ago, data showed on Monday. The growth can be attributed in part to increased construction spending and booming company profits.

Germany's gross domestic product (GDP) expanded by 0.9 percent in the second quarter of this year compared with the first quarter, federal statistics office Destatis said in a statement.

That represented an acceleration from the 0.7 percent growth rate in the preceding three months and was the fastest rate of growth since the first quarter of 2001.

Data from the EU's Eurostat data agency showed Monday that German expansion had helped the euro zone economy to hit its fastest rate of growth in six years in the second quarter.

Domestic growth stimuli

This time, growth in Germany was not solely export-driven, as it had been in previous economic upturns in the country.

"Growth impulses are coming primarily from inside Germany," Destatis said. "While the momentum of foreign trade has weakened, it was primarily investment in construction and equipment that contributed to the economic pick-up in the second quarter."

Over 12 months, growth measured one percent in the second quarter because of differences in the number of working days. When adjusted for working days, growth was at 2.4 percent.

The unseasonably warm weather helped boost activity in outdoor sectors such as the construction industry and companies are investing their record-high profits in new plants and equipment.

World Cup and upcoming VAT increase

The World Cup soccer championships, held in Germany in June and July, also provided a boost to consumer spending, a sector had previously held back the development of a broad-based recovery in Germany.

Furthermore, households are bringing forward big-ticket purchases ahead of the planned rise in value-added tax (VAT) from 16 percent to 19 percent, which will take effect in January.

The ministry of economy in Berlin hailed the second-quarter GDP data as proof that the economic gridlock of recent years had finally been lifted.

"The recovery has gained in breadth and strength," said Economy Minister Michael Glos. "The situation on the labor market has improved noticeably. The outlook for this year is decidedly positive."

The DIHK federation of German chambers of commerce agreed.

"Our forecast for full-year growth of up to two percent is within reach," DIHK president Martin Wansleben added.

Growth across the euro zone

Other euro zone countries, such as France and the Netherlands, have similarly beaten growth expectations for the second quarter, suggesting that the European Central Bank (ECB) may have to revise its own growth forecasts for the entire euro area.

The euro zone expanded by 0.9 percent in the second quarter, separate data published by the EU's statistics office Eurostat showed on Monday. The expansion of the euro zone economy added to the arguments for further interest rate hikes by the ECB.

The ECB's benchmark refinancing rate currently stands at 3 percent and is expected to rise to 3.5 percent by the end of this year in order to keep a lid on inflation in the 12 countries that share the euro.

"The German GDP data are almost too good to be true," said Bank of America economist Holger Schmieding. "In less than two years, Germany seems to have turned from the sick man of Europe into one of the old continent's 'Wunderkinder.'"

Some say euro zone growth to start losing steam

However, some analysts were skeptical about whether the German economy would be able to maintain the same momentum during the coming months given the planned rise in VAT, which experts believe will put the brakes on consumer demand next year.

"The weather-driven rebound in second-quarter construction will not be repeated in the third quarter," said Schmieding at Bank of America. "Retail sales may recede after the World Cup effect in May and June" and the VAT increase will be also provide a temporary hit to activity.

The European Commission in Brussels also predicted that euro zone growth would probably start losing steam soon, with analysts pointing the finger at the stronger euro, slowing global growth, high oil prices, higher interest rates and tighter fiscal policy.

In Germany, DIHK similarly warned that German growth may soon pass its zenith, not least because of the VAT hike and the one-off nature of the World Cup effect.