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'First ray of hope' as German economy returns to growth

'First ray of hope' as German economy returns to growth
FILE PHOTO: Construction workers are silhouetted while standing on scaffolding at the construction site of the new headquarters of the European Central Bank (ECB) during a guided media tour in Frankfurt, October 31, 2013. REUTERS/Kai Pfaffenbach -
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Kai Pfaffenbach(Reuters)
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By Michael Nienaber and Rene Wagner

BERLIN (Reuters) - The German economy returned to growth in the first quarter as householders spent more freely and construction activity picked up, but the government cautioned that the outlook remained clouded by trade disputes.

Gross domestic product (GDP) rose 0.4% quarter-on-quarter, Wednesday's Federal Statistics Office data showed. Year on year it grew a calendar-adjusted 0.7%. Both preliminary readings were in line with market expectations.

Economy Minister Peter Altmaier told Reuters the figures offered a "first ray of hope" following two quarters without expansion, but it was too early to give the all-clear.

"The international trade disputes are still unresolved. We must do everything possible to find acceptable solutions that enable free trade," Altmaier said.

The U.S. and China have ramped up their trade conflict, with Beijing this week announcing new tariffs against U.S. imports after Washington ramped up levies on Chinese imports. Both countries are important markets for German exporters, meaning the tariffs are hurting their businesses too.

U.S. President Donald Trump may also this week increase tariffs on European car imports, which would have a disproportionate impact on Germany.

Altmaier, a confidant of conservative Chancellor Angela Merkel, repeated a call to support companies by cutting red tape and taxes. Finance Minister Olaf Scholz, a Social Democrat, has declined to cut corporate taxes.

The Statistic Office said growth was mainly driven by construction and increased household spending. Corporate investments in machinery and equipment also helped, while state spending was slightly negative.

MIXED SIGNALS

"The trade development sent mixed signals as exports and imports both picked up on the quarter," the office said, leaving open the question whether net trade had a positive impact on GDP.

The Office will publish more detailed growth data next week which should shed more light on which sectors of the economy contributed to growth and to what extent.

It confirmed that the German economy contracted by 0.2% in the third quarter of last year and stagnated in the fourth.

Headwinds from abroad suggest any growth rebound this year is likely to be modest.

"In normal times, today's growth figures would be reason enough to revise up GDP projections," DekaBank analyst Andreas Scheuerle. "But in light of the massive threats for world trade, economists are likely to keep their powder dry."

German exporters are also struggling with weaker foreign demand and uncertainty caused by Britain's chaotic departure from the European Union.

The government halved its 2019 growth forecast to 0.5% last month. That would mark a sharp slowdown after expansion rates of 2.2% in 2017 and 1.4% in 2018.

ING economist Carsten Brzeski said the growth figures should be no reason for complacency. "In fact, the economy still needs more investment, both from the private and public sectors, as well as new structural reforms," Brzeski said.

(Reporting by Michael Nienaber and Rene Wagner, editing by Riham Alkousaa and John Stonestreet)

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