Solid domestic demand fuels bumper growth in Germany

Broad-based domestic demand drove the strongest German quarterly expansion in more than a year between April and June, fuelling optimism Europe's largest economy will outperform in 2013 and support the nascent euro zone recovery.

Details released on Friday showed a construction flurry after the harsh winter, firms' strong appetite for machines and equipment and healthy private consumption all underpinned a 0.7 percent quarterly rise in gross domestic product (GDP)

Analysts said Germany's bounce-back could prompt upwards revisions to 2013 growth forecasts and support the tentative recovery in the euro zone economy, which returned to growth in the second quarter after 18 months of contraction.

"The composition of the growth is very good. It is being driven more strongly from within, which is good for Germany and the euro zone," said economist Holger Sandte at Nordea. "It is also positive that firms are investing more in equipment and are not so hesitant anymore."

The data also confirmed an earlier flash estimate showing Germany's gross domestic product (GDP) was up 0.9 percent on the year in the second quarter.

Domestic demand added 0.5 percentage points to GDP in the quarter and foreign trade 0.2 percentage points.

"Growth is broadly supported - two-thirds comes from domestic demand, a third from trade... This could be the start of a long upturn for investment. Low interest rates and returning confidence provide a sound basis for this," said Christian Schulz at Berenberg Bank.

MILD SLOWDOWN FOR SECOND HALF

The strong second-quarter growth data, released a month before a federal election, will be welcome news for Chancellor Angela Merkel as she seeks a third term in the vote on September 22.

Her government expects growth of 0.5 percent in 2013, but Finance Minister Wolfgang Schaeuble said this week the year's growth could end up being as high as 0.7 percent.

While Europe's economic powerhouse steamed ahead during the early years of the euro zone crisis, it slowed last year and even contracted in the fourth quarter as exports languished and investment was sluggish.

But investments picked up significantly between April and June, largely due to weather-related catch-up effects after an unusually long and cold winter, while net trade also made a positive contribution to growth.

The Economy Ministry and the Bundesbank have cautioned that growth will probably be more moderate in the second half given that bumper second-quarter growth was partly due to those catch-up effects and Germany still faces a tough international environment.

However the labor market is still robust, supporting future domestic spending.

"Up to now, soft indicators released for the third quarter have been promising, indicating that the expected slowdown of the economy in the second half of the year should be mild," said ING economist Carsten Brzeski.

"In fact, the current growth mix should continue in the remainder of the year: decent consumption on the back of the strong labor market accompanied by a gradual export recovery."

(Reporting by Alexandra Hudson and Stephen Brown; Editing by Noah Barkin/Jeremy Gaunt)