Euro edges down as German GDP growth slows in the second quarter

The German economy slowed in the second quarter, but its budget surplus jumped in good news for Angela Merkel ahead of next year's crucial elections.

The euro fell slightly against the dollar, down 0.3 per cent to $1.1276 in early trading, after statistics body Destatis showed growth had fallen to 0.4 per cent, down from 0.7 per cent in the first three months of the year.

The government's coffers were boosted however by an €18.5bn (£15.8bn) surplus in the first six months of the year – equivalent to 1.2 per cent of GDP. The healthy government balance sheet, which stands in contrast to the rest of Europe, frees Merkel up to indulge in some pre-election spending over the next 12 months, economists suggested.

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Howard Archer of IHS Global said the chancellor was in the "favourable position of being able to provide fiscal stimuli without seriously risking renewed slippage into deficit."

Although GDP growth dipped, the first quarter of the year was the strongest growth since the end of 2014, and economists had not expected the Germany economy to be able to repeat the feat in the second quarter.

Destatis said most of the growth had been driven by strong exports, which rose by 1.2 per cent compared with the first quarter of 2016. Imports declined by 0.1 per cent in the same period.

Meanwhile, household consumption rose 0.2 per cent, while government expenditure rose 0.6 per cent on the previous quarter. 

And labour productivity dropped, too, with people in employment producing 0.2 per cent less than the previous year when measured as the price-adjusted GDP per hour.

Earlier this summer, the Bundesbank cut its growth forecast for the year by 0.1 percentage points after the European Central Bank suggested outlook for the euro area's growth was bleak. 

"Domestic demand is still quite weak," said Naeem Aslam, chief market analyst at Think Markets, this morning. 

"And it is a similar story for the export numbers as well. We are not seeing much improvement on construction investment, and government spending is not picking up."