A surge in investment propelled German economic growth to its fastest pace in two years in the first quarter as mild winter weather encouraged construction.

Building activity jumped 2.3 per cent at the start of the year, driving up capital investment by 1.8 per cent, the Federal Statistics Office in Wiesbaden said on Tuesday. Private consumption rose 0.4 per cent.

Gross domestic product increased a seasonally-adjusted 0.7 per cent in the January-March period, in line with a May 13th estimate. Record-low unemployment in Germany is underpinning consumer demand, while companies are benefiting from a cyclical recovery in the 19-nation euro area driven by European Central Bank stimulus. The Bundesbank has expressed confidence that the country's economy can retain its underlying strength, even though expansion will slow somewhat this quarter.

“Growth was broad-based, with private consumption and construction investment shouldering a great share,” Johannes Gareis, an economist at Natixis in Frankfurt, said before the report. “Looking to second-quarter growth, we think the German economy is unlikely to repeat the blockbuster performance seen in the first quarter, also due to some payback from the boost to construction investment from mild weather.”

Orders slowdown

The Ifo institute’s business-climate index due on Wednesday will provide some clues on the severity of the slowdown. A survey of purchasing managers sent mixed messages on Monday, suggesting private-sector growth in Europe’s largest economy accelerated in May at the fastest pace this year as companies worked through their backlogs, while a gauge measuring new orders fell to the lowest level in 10 months.Investment contributed 0.4 percentage point to growth in the first quarter, with private consumption adding 0.2 point and government spending 0.1 point, according to the report. Net trade subtracted 0.1 percentage point from GDP expansion as imports outpaced exports.

Bloomberg