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German companies increased construction spending and investment in machinery the first quarter, fueling the fastest economic expansion in 12 years.

Construction spending rose 4.5 percent from the fourth quarter, the Federal Statistics Office in Wiesbaden said today. Investment in plant and machinery gained 4 percent in the period. Gross domestic product grew 1.5 percent from the previous quarter, when it increased 0.3 percent, the office said, confirming a preliminary estimate published on May 15.

Companies in Europe's largest economy stepped up investment and hiring as an unusually mild winter kept construction sites open in the first three months of the year. Germany's DIW institute this month forecast the economy will cool as a stronger euro hurts exports and record oil prices sap purchasing power.

“Let's cherish the last good GDP figure,'' said Andreas Rees, chief German economist at Unicredit Markets and Investment Banking in Munich. “In our view, a strong setback in the second quarter is a done deal.''

The economy may expand 0.5 percent in the current quarter from the first and cool further in coming months, the Berlin-based DIW institute said on May 16. The BDB banking association said on May 22 the second quarter will show a “correction'' in growth. In the year, the economy may grow between 2.25 percent and 2.5 percent after 2.5 percent expansion in 2007, BDB said.

Mild Winter

In the economy of the 15 euro nations, growth accelerated to 0.7 percent in the first quarter from 0.4 percent in the previous three months. The French economy also expanded at a faster-than- expected pace in the first quarter of 0.6 percent.

In Germany, inventory building added 0.7 percentage point to growth in the first quarter. Consumer spending contributed 0.2 percentage point and construction 0.4 percentage point.

German builders benefited from an “exceptionally mild'' and sunny winter, with temperatures 2.7 degrees Celsius above the long-term average, according to the German weather service. That's the sixth warmest since 1901.

Hochtief AG, Germany's largest construction company, said May 15 that first-quarter profit more than tripled. While the Essen- based company expects higher sales in 2008, pretax profit will be flat as the euro's appreciation hampers orders.

The euro has appreciated 8 percent against the dollar this year, making European exports less competitive payday advance lenders. The single currency reached an all-time high of $1.6019 on April 22.

Imports Exceed Exports

In the first quarter, imports grew 3.5 percent, exceeding export growth of 2.4 percent, today's report showed. Net trade reduced growth by 0.2 percentage point.

At the same time, surging oil prices are driving up inflation, eroding the spending power of both consumers and companies. Crude oil reached a record $135.09 a barrel on May 22.

German consumer spending rose 0.3 percent in the first quarter from the previous three months, when it fell 0.8 percent, the statistics office said. The household savings rate increased to 14.8 percent from 14.4 percent a year earlier.

Companies are also grappling with the collapse of the U.S. subprime mortgage market, which triggered more than $382 billion in losses and writedowns, boosted lending costs and pushed the world's largest economy to the brink of a recession.

Still, German business confidence unexpectedly rose in May and unemployment declined in April for a 27th month.

`Dark Clouds'

Economy Minister Michael Glos said May 23 that while there are “dark clouds on the horizon,'' the German economy is coping well. Bundesbank board member Hermann Remsperger said on May 16 that he's still “rather optimistic'' about the outlook.

German companies are expanding in faster-growing markets to boost earnings. Volkswagen AG, Europe's largest carmaker based in Wolfsburg, Germany, said May 23 it sold 11 percent more cars and commercial vehicles in April as faster growth in China and Brazil offset a drop in North America.

Salzgitter AG, Germany's second-largest steelmaker, on May 21 reiterated its full-year 2008 earnings target. “Despite rising commodities prices at the beginning of this year, the outlook for 2008 is good in all the company's divisions,'' Chief Executive Officer Wolfgang Leese said.

The European Central Bank this month kept its key rate at a six-year high of 4 percent, saying the euro-area economy is “sound'' and inflation remains a bigger concern. The ECB's 21- member Governing Council is scheduled to hold its next monetary assessment on June 5 in Frankfurt.

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