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German Economic Growth Accelerates in Second Quarter -- 2nd Update

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08/14/2018 | 12:27pm CEST

By Nina Adam and Paul Hannon

FRANKFURT -- Germany's economic growth accelerated in the second quarter, ensuring the eurozone as a whole avoided a slowdown, but economists said global trade tensions and a currency crisis in Turkey are clouding the outlook for businesses.

Germany's gross domestic product grew at a quarterly rate of 0.5%, or 1.8% in annualized terms, the Federal Statistical Office said Tuesday. It also raised its first-quarter growth estimate to an annualized 1.5% from 1.2% growth reported in May.

Bolstered by the stronger-than-expected figures, the European Union's statistics agency raised its second-quarter growth estimate for the entire eurozone to 1.5% in annualized terms from 1.4% reported in late July. That means the growth rate was unchanged from the first quarter, rather than the previously reported easing.

"Germany has pulled off an impressive feat," said Oliver Rakau, chief German economist at Oxford Economics. "In contrast to the performance of its eurozone peers, growth has picked up slightly in the second quarter."

Economic activity in Italy and Spain eased in the second quarter compared with the first three months of the year, while the French economy grew at a steady yet low pace.

The pickup in the German economy was led by domestic demand, the statistics body said, with a rise in households and government spending.

Private consumption is expected to remain solid in the coming months, supported by a buoyant labor market and rising wages. However, rising inflation is partly eroding higher pay.

Investments in plants and machinery picked up too, albeit only slightly, the German statistics body said, while net exports acted as a drag on second-quarter growth.

Trade tensions -- especially a souring in relations between the U.S. and China -- have already began to undermine German business sentiment and companies' appetite for bigger projects.

While forecasters have turned more bullish on the U.S. economy largely thanks to tax cuts, they have grown nervous about the outlook for the eurozone.

"The euphoria among German exporters we saw last year has clearly ebbed, and the mood is much more sober now," said Klaus Wohlrabe, an economist at the Ifo institute.

Germany's economy has lost momentum compared with last year, when the economy returned growth of well over 2% in annualized terms in each and every quarter, and recent data suggest it won't pick up soon.

The country's manufacturing orders -- an indicator of future production -- dropped 4.0% in June from May led by a 5.9% drop in demand from outside the eurozone.

The VDMA industry group warned Monday that companies are feeling the pinch from Turkey's currency crisis, with the lira down more than 70% against the euro since the start of 2018. German plant and machinery exports to Turkey fell 4.7% in January through May compared with the same period in 2017, according to the VDMA, which expects the trend to continue.

Although Turkey isn't among Germany's largest trading partners, the economic turmoil there could still hurt business confidence and bank lending in the eurozone, economists said.

Write to Nina Adam at nina.adam@wsj.com and Paul Hannon at paul.hannon@wsj.com

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