Germany’s economy grew at its fastest rate in three years in the first quarter, driven by domestic factors, while a leading indicator of sentiment signalled that expansion in Europe’s largest economy is set to slow.

Strong investment and more freely-spending consumers drove the German economy to a seasonally-adjusted 0.8 per cent quarterly growth rate, according to the Federal Statistics Office. That was twice the rate in the final quarter of last year and meant Germany was the growth engine of the euro zone's €9.5 trillion economy.

Growth was helped by milder than usual winter weather which meant the usual spring upturn was brought forward. Exports, the traditional backbone of the German economy, were a drag on growth.

“Positive impetus came exclusively from within the country in a quarter-on-quarter comparison,” the Statistics Office said.

Economists and the government expect growth to slow after the strong first quarter. The government sees the German economy expanding by 1.8 per cent this year, down from the year-on-year growth rate of 2.5 per cent in the first quarter.

Germany’s leading indicator of business morale, the Ifo index, on Friday also pointed to a reduced growth rate, falling in May to the lowest level so far this year and missing expectations.

In the first quarter, German plant and equipment investment grew by 3.3 per cent, the strongest level in 3.5 years, while construction investment, up 3.6 per cent, was the strongest on the quarter in three years.

Domestic demand added 1.7 percentage points to GDP in the first quarter, while foreign trade subtracted 0.9 percentage points. Private consumption added 0.4 percentage points.

Reuters