Wires

UPDATE 3-German exports surge, economy seen slowing

(Adds industrial production, euro zone Sentix index, graphics)

By Michelle Martin

BERLIN, Oct 8 (Reuters) - Germany's trade surplus hit itshighest level in five years in August after a surprise jump inexports while output dipped only slightly, highlighting theeconomy's resilience to the euro zone crisis, althougheconomists see a slowdown ahead.

The better-than-expected trade figures came after a stringof disappointing data from Europe's economic powerhouse, wherebusiness sentiment and industrial orders have slipped, theprivate sector has contracted, and unemployment has risen.

Seasonally adjusted exports jumped 2.4 percentmonth-on-month, far outperforming expectations for a drop of 0.5percent and beating even the highest forecast in a Reuters pollfor a 0.5 percent rise.

The export outlook is clouded, however, with recessiondeepening in the euro zone and further signals on Monday thatChina and other emerging Asian economies - key markets forGermany's high-value manufacturers - are slowing.<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

GRAPHICS ON GERMANY'S ECONOMY AND EURO ZONE SENTIMENT

Germany's trade balance:

German industrial production:

Euro zone Sentix index:

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Separate data published on Monday showed German industrialoutput edged down in August due to a weaker construction sector,though the Economy Ministry said the trend in productioncontinued to be "quite stable".

"Today's data illustrate the relative strength of the Germaneconomy," said Carsten Brzeski, a senior economist at ING.

"However, the data also give the impression that Germanindustry is in the middle of a clearance sale. A mix of surgingexports, dropping orders and declining industrial productiondoes not bode well for the future."

The jump in exports boosted the seasonally-adjusted tradesurplus to 18.3 billion euros, its widest since September 2007,from an upwardly revised 16.3 billion euros in July. It came inwell above the consensus forecast for it to narrow to 15.3billion euros.

Imports inched up a mere 0.3 percent, raising questionsabout the level of domestic demand in Germany, which manyeconomists had expected would prop up growth during the eurozone crisis and a global economic slowdown.

CUSHION

For a long time Germany's economy seemed impervious to theeuro zone's troubles but growth slowed to 0.3 percent in thesecond quarter from 0.5 percent in the first as firms held backon investments due to uncertainty in the 17-nation bloc.

Many economists now predict a German contraction in thethird and possibly fourth quarters, although they said Monday'strade data would help cushion the slowdown in the third quarter.

"It is incredible how German exports are winning in such atough environment," said Andreas Scheuerle at DekaBank.

"The strongest areas of growth recently came from Asia andEurope outside the euro zone. The data should influenceGermany's economic output positively in the third quarter."

In further good news, euro zone sentiment improved for thesecond consecutive month in October on the back of monetaryeasing from central banks and helped also by the Germanconstitutional court's approval of the euro zone's new bailoutfund, Sentix research group said on Monday.

But the World Bank cut its economic growth forecasts for theEast Asia and Pacific region on Monday and said there was a riskChina's slowdown could worsen and last longer than many expect.

Meanwhile, in a sign of continued jitters over the euro zonecrisis, investors effectively paid the German government in adebt auction on Monday to store their cash in six-month bills,opting for safety over returns.

A breakdown of the trade data showed that imports from theeuro zone climbed by 1.1 percent on the year in August, comparedwith a more muted 0.4 percent overall year-on-year rise inimports and a 0.4 percent drop in shipments to non-euro zonecountries in the European Union.

The data also showed that Germany found it harder to findbuyers for its goods in the euro zone in August compared with ayear ago, with shipments to countries in the troubled bloc downsome 3.1 percent as several governments implement harshausterity measures.

RECESSION AHEAD?

Economists warned against reading too much into the dip inproduction in August given that the figures fluctuate stronglyfrom month to month.

"August's small fall in German industrial productionsuggests that the economy probably continued to expand in thethird quarter," said Jennifer McKeown, Senior European Economistat Capital Economics.

But the deepening recession in much of the euro zone andweak German domestic demand point to gloom ahead, she added.

"While Germany is faring relatively well for now, we suspectthat it will slip back into recession around the turn of theyear," McKeown said.

Activity in the construction sector fell by 2.8 percent andfactories churned out 1.3 percent fewer intermediate goods,dragging overall output down. Energy output, which rose by 1.5percent, was the main bright spot.

Industrial output remains relatively robust in Germanycompared with its struggling euro zone peers such as Spain,where production fell by 3.2 percent year-on-year in August,marking the 12th straight month of slowing production.

(Additional reporting by Stephen Brown; Editing by Gareth Jonesand Catherine Evans)

((MichelleHannah.Martin@thomsonreuters.com)(+49 30 2888 5223))

Keywords: GERMANY ECONOMY/