Boom time for German economy as politicians bicker

By Michael Nienaber

BERLIN (Reuters) - Strong exports drove robust growth in Germany at the end of last year while inflation stayed subdued in January, adding to signs that Europe's biggest economy is on track to extend its upswing well into 2018.

With upbeat businesses and households largely shrugging off an uncertain political backdrop, quarterly growth reached 0.6 percent between October and December, according to Wednesday's Federal Statistics Office data.

"The German growth turbo remains fully activated," Bankhaus Lampe analyst Alexander Krueger said.

While its politicians have been mired in coalition talks since inconclusive national elections last September, the economy has powered ahead on a consumer-led upswing driven by record-high employment, increased job security, rising real wages and low borrowing costs.

That momentum has been supported in recent months by a rebound in exports and company investments.

Fourth quarter growth was in line with consensus forecasts, dipping from a downwardly revised 0.7 percent in the third. The statistics office said positive contributions in the latest quarter came mainly from foreign demand.

Government consumption expenditure increased while household spending was little changed, the office said. It will release more detailed results on Feb. 23.

On the year, the economy expanded a calendar-adjusted 2.9 percent - missing a consensus of 3.0 percent but still the strongest pace of growth since the second quarter of 2011.

The office confirmed an earlier estimate for full-year growth of 2.2 percent in 2017 which translated into a calendar-adjusted 2.5 percent, the strongest pace since 2011.

The government expects the consumer-led upswing to continue this year, forecasting 2.4 percent growth, while the DIHK Chambers of Industry and Commerce raised its 2018 forecast to 2.7 percent last week.

Sounding a note of caution, Bankhaus Lampe's Alexander Krueger said production bottlenecks and capacity constraints were likely to dampen future growth.

But ING Bank economist Carsten Brzeski said that, judging from previous cycles, "the economy could continue its current pace for at least one or two more years, without showing signs of overheating."

It had grown in 33 of the last 36 quarters, at an "impressive" average rate of 0.5 percent on the quarter, he added.

SENTIMENT HIGH, INFLATION LOW

The Economy Ministry also struck an upbeat tone on Wednesday, saying in its monthly report that strong sentiment indicators and buoyant foreign demand for German industrial goods were pointing to a good start for the economy in 2018.

"As capacity utilisation in industry continues to increase, high external demand should also stimulate domestic investment in equipment," the ministry said.

"Given the good foreign trade conditions... the solid upswing should continue on a broad basis."

Separate data from the Statistics Office showed that inflation remained subdued despite the solid upswing.

EU-harmonised consumer prices fell by 1.0 percent in January and rose by 1.4 percent year on year. Equivalent non-harmonised data showed a fall of 0.7 percent and a rise of 1.6 percent.

That weak data is lending support to the European Central Bank's cautious approach to reducing the monetary stimulus that is supporting economic activity across the single currency bloc.

Meanwhile, concerns that the risk of fresh elections may put a dampener on that activity in Germany have yet to materialise.

"Political uncertainty since September's election appears not to have damaged business or consumer sentiment," Capital Economics analyst Jennifer McKeown said.

Provided that a renewed 'grand coalition' government between Chancellor Angela Merkel's conservatives and the centre-left Social Democrats (SPD) is finally put in place next month, consumer spending should be lifted from additional fiscal measures to help families, she added.

But that deal is far from certain.

Internal divisions within the SPD have deepened since the party agreed a coalition deal with the conservatives last month, and its leader Martin Schulz resigned on Tuesday.

If its 464,000 members fail to endorse the agreement in a March 4 vote that looks too close to call, a new election is likely.

(Reporting by Michael Nienaber; Editing by Paul Carrel and John Stonestreet)