German industry output rises more than expected in August

BERLIN (Reuters) - German industrial production rose more than expected in August, posting its biggest increase since January and signalling that the sector will contribute to growth in the third quarter. Industrial output rose by 2.5 percent on the month, data from the Economy Ministry showed on Friday, ahead of the consensus forecast in a Reuters poll for an increase of 0.8 percent. It posted its biggest monthly increase since January, when output rose by 2.8 percent. This is likely to further ease growth concerns after weak data in July, when industrial production fell by 1.5 percent. "All in all the results indicate a presumably restrained increase of production in the industry sector in the third quarter," the Economy Ministry said in a statement. Construction was the only sector to post a drop, falling by 1.2 percent. A 3.3 percent in manufacturing output more than compensated for the fall in construction, the data showed. ING Bank chief economist Carsten Brzeski said the strong rebound indicated that the initial shock caused by Britain's vote in June to leave the European Union had been digested, adding that in the coming months production would remain stable. Concerns about a slowdown were eased on Thursday after the Economy Ministry reported a bigger-than-expected rise in industrial orders, suggesting that factories will provide economic impulse. CONSUMPTION TO SLOW Still, economists expect the construction sector and private consumption to remain the main growth drivers this year, fuelled by increased state spending on refugees, record-high employment and low interest rates. "Going into 2017, however, weaker real wage growth and the dropping inflow of refugees should weigh on consumption growth," Brzeski said. Economists say the government should boost investments on high-technology infrastructure and education, give incentives for more corporate investments, and facilitate financing for start-ups and venture capital to ensure long-term growth. One year before a federal election next year, German Chancellor Angela Merkel's conservatives and their Social Democrat junior coalition partners have taken differing positions on the economy. Merkel on Thursday promised voters tax relief of 6 billion euros and defended her government's goal of keeping the budget balanced. "This clearly has the flavour of an election present. However, before anyone gets carried away by the idea of big-scale fiscal stimulus in Germany, the announced tax relief should amount to only 6 billion euros, spread over two years. Less than 0.1 percent of GDP per year," Brzeski said. Economy Minister Sigmar Gabriel, leader of the Social Democrats said on Thursday that it made more sense for Germany to invest in its future rather than spend the budget surplus on tax cuts, a subtle criticism of Merkel. Gabriel will later on Friday present the government's updated growth forecast for 2016 and 2017. It earlier predicted a 1.7 percent expansion this year and 1.5 percent next year. (Additional reporting by Caroline Copley)