German Growth to Slow after Third-Quarter Pick-Up

German economic growth rebounded in the third quarter, buoyed by domestic demand, but the pace of expansion is probably slowing already as surging oil prices and the strong euro put firms on the defensive.

German gross domestic product (GDP) growth accelerated to a quarterly rate of 0.7 percent from 0.3 percent in the second quarter, chiefly thanks to companies building up their stocks, Federal Statistics Office data showed on Thursday.

On the year, the economy grew by 2.4 percent in the third quarter.

Private consumption also boosted growth, though a surge in imports meant the contribution from net trade was negative. Growth in equipment investment was its weakest in over a year.

DekaBank economist Sebastian Wanke said it was disappointing GDP growth had been so reliant on a 0.4 point contribution from inventories -- a highly volatile variable which has alternately heavily subtracted from or boosted growth over the past year.

"We think there'll now be a marked dent in the upswing which started this quarter and will last until mid-2008," he said.

Firms' planning has been dogged by uncertainty as oil prices spike to nearly $100 per barrel and the euro breaches record highs against the dollar of more than $1.48, making it harder for exporters to stay competitive.

Wolfgang Ziebart, chief executive of German chip maker Infineon Technologies AG, said earlier this month he expected the burden of the weak dollar to grow in its current financial year, noting it hit the firm's sales and profits.

As worries about costs grow, the latest data show corporate investment in Europe's largest economy has not only been weaker than previously reported, but that it is also slowing.

Investment Lull

Spending on plant and equipment was up just 0.4 percent during the July-September period. The Office also revised down growth in equipment investment during the second quarter to 0.9 percent from a previous estimate of 2.5 percent.

Economists at Commerzbank said the slowdown in investment probably reflected the impact of higher European Central Bank interest rates, which have now reached 4.0 percent.

"We expect real GDP growth of just under 0.5 percent in the fourth quarter of 2007 and less than 0.25 percent in the first quarter of the new year," they wrote in a research note.

Changes to provisions for writing off company outlays against tax in 2008 are also likely to act as a dampener on German investment next year.

With employment numbers at their highest level since German re-unification in 1990, and wage growth in some sectors the strongest in years, analysts believe consumers will help to sustain domestic growth over the coming year.

However, the sharp rise in oil prices and the cost of everyday foodstuffs will not help this, economists say.

There are concerns that weaker global growth, particularly in the United States, will erode Germany's export potential, which is already constrained by the euro's appreciation against currencies including the dollar and the British pound.

Recent falls in German firms' export expectations may partly reflect this, the German Finance Ministry said on Thursday.

"This may reflect the slowdown in the global economy that is already generally expected, as well as the negative effect on export activity of the euro's appreciation," it said.

Still, Germany's export industry could cope if the euro exchange rate appreciated to $1.50, the head of the country's BGA exporters' group told a newspaper on Thursday.