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Last Updated: Tuesday, 24 August, 2004, 10:09 GMT 11:09 UK
German economic growth picks up
Gerhard Schroeder
Mr Schroeder has staked his career on unpopular reforms
German economic growth has picked up in the second quarter, driven by strong demand for exports.

Europe's largest economy grew by 0.5% in the three months to the end of June from the previous quarter and 2% from the same period a year earlier.

Analysts however question whether the economic recovery can be sustained.

They expect exports to fall in the second half of the year and fear that domestic demand will not be strong enough to compensate for this fall.

"The second quarter was probably the peak in the German business cycle," said Joerg Kraemer, an economist at Invesco Asset Management.

Breakdown of figures

Concern is centred on the fact that rising exports appear to be the sole driver for economic growth.

According to Tuesday's figures, exports rose 3.3% in the second quarter while imports advanced 2.2%.

There were however only small increases in private and public consumption and there was a decline in construction and capital investment.

In a separate report, Germany's budget deficit hit 4% of gross domestic product in the first six months of the year, exceeding European Union (EU) limits.

The German government has already predicted a budget deficit of 3.5% for this year, the third year in a row that it has exceeded the 3% cap. It has promised to bring spending under control.

German Chancellor Gerhard Schroeder last week vowed to continue with unpopular welfare reforms.

The government says the reforms are necessary to revive economic competitiveness.

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