By Todd Buell

FRANKFURT--German growth is expected to slow in the third quarter before bouncing back at the end of the year, but despite a sharp drop in industrial output, sentiment data suggest the country's manufacturers remain in good shape.

Total industrial output fell by 1.8% on the month in September, partly reversing the previous month's 3.0% gain, the country's economics ministry reported Tuesday. Analysts polled by The Wall Street Journal had expected a drop of just 0.6%.

The monthly decline "is not the start of a new trend," said Berenberg economist Florian Hense, attributing the dip to monthly volatility.

Other data showed that Germany's adjusted trade surplus was lower than expected. The surplus was recorded at EUR21.3 billion ($23.6 billion), Germany's statistics office reported. Polled economists had forecast EUR23.0 billion.

The data suggest that third-quarter GDP growth "was not able to keep the pace of the first half of the year," said Rainer Sartoris, an analyst with HSBC. "But sentiment indicators do point to a pickup of activity at the end of the year." Germany grew by 0.4% on the quarter in the second quarter after a robust 0.7% in the first quarter.

Despite some recent data disappointments, economists have taken solace in positive data assessing the mood of German firms. "German business sentiment has been surprisingly strong in recent months," said UniCredit analyst Andreas Rees, noting also that manufacturers should feel a "tailwind" from improving sentiment data in emerging markets.

The country's closely watched Ifo business survey has risen for two months in a row. A purchasing managers' survey published last week hit nearlya three-year high.

Berenberg expects the German economy to grow 0.4% on the quarter in the final quarter of the year after 0.3% in the third. Germany's statistics office is due to publish third-quarter GDP data next week.

Some economists are less optimistic. "While the surveys point to an acceleration, we suspect that they will prove too optimistic again as rising inflation dampens consumer spending," said Jennifer McKeown of Capital Economics.

Plenty of risks still remain. The outlook in China is unclear, as are the final ramifications of Britain's decision to leave the European Union, and, of course, the outcome of the U.S. presidential election being held Tuesday.

"The combination of Brexit uncertainty, a mature business cycle and political and economic uncertainty in many important trading partners keeps the industry treading water," said ING economist Carsten Brzeski.

Write to Todd Buell at Dow Jones Newswires

November 08, 2016 07:36 ET (12:36 GMT)

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