FRANKFURT (Reuters) - Growth in the German economy, Europe's biggest, remains robust but the underlying momentum has likely weakened and the risk of a global trade war remains, the Bundesbank said on Tuesday in a regular monthly economic report.
Much of the first-quarter dip in growth was due to exceptional factors so a rebound is still likely, even if the overall growth momentum has also softened somewhat, the Bundesbank said.
"We expected that the boom in Germany will continue," the Bundesbank said. "However, the underlying economic momentum may have weakened earlier than expected to an expansion rate only slightly above potential growth.
"This would suggest that already high capacity utilisation will rise more slowly in the future," it said, adding that industry's order book was solid, even if its output failed to live up to expectations in the first quarter.
German growth halved to 0.3 percent in the first quarter, its lowest reading in six quarters, raising concern that Europe's engine of growth was losing momentum and suggesting that the euro zone's five-year expansion may have peaked.
The slowdown comes at a sensitive time for the European Central Bank, which is debating whether to end a 2.55 trillion euro bond purchase scheme, satisfied that growth is strong enough now to generate much needed inflation.
But the Bundesbank dismissed some of these worries, arguing that the slowdown has to be seen in the context of exceptionally strong momentum since mid-2016.
"Consumer sentiment remains high and global economic growth should remain buoyant over the coming quarters," it added.
Still, downside risks to global growth remain, particularly with relation to U.S. trade policy and its ongoing dispute with China, which risked developing into a broader trade war, the Bundesbank added, repeating its concern over trade friction.