By Nina Adam and Andrea Thomas
BERLIN -- Germany's economy grew strongly in 2016, propelled by a buoyant labor market and a pickup in government spending, likely making it one of the fastest-growing of the Group of Seven industrialized nations.
Gross domestic product expanded 1.9% in 2016 in inflation-adjusted terms, the Destatis statistics body said on Thursday. This is the highest rate since 2011, beating the government's own prediction of 1.8% growth.
There was a pickup in economic activity late in the year. A statistician with Destatis said GDP probably expanded by around 0.5% in the fourth quarter from the third quarter. An official forecast is due Feb. 14.
"The restraint seen in the third quarter has been overcome," the economics ministry said in its monthly report on Thursday, pointing to solid industrial production and an improving global environment.
However, an uneasy mix of rising inflation and a zero interest rate has started to unsettle voters, as it may erode households' savings and wage gains.
It has also prompted German politicians -- including within Chancellor Angela Merkel's ranks -- to call for an end of the European Central Bank's ultra-loose monetary policy.
"With inflation picking up markedly, there is really no argument left that speaks in favor of a zero-interest-rate policy," said Carsten Linnemann, a lawmaker with the Christian Democrats.
Inflation in Europe's largest economy has risen to its highest level in almost 3 1/2 years, largely as a result of higher oil prices. The Bundesbank forecast in December that inflation, measured according to European Union harmonized standards, would rise to about 1.4% in 2017 from 0.3% in 2016.
That is a concern for Germany's households, who are sitting on around EUR2 trillion ($2.1 trillion) of deposits. The populist Alternative for Germany party is trying to cash in on the mood swing, as it seeks to win its first seats in the national parliament.
"The ECB interest rate policy is putting German savers at risk," said the party's chairwoman, Frauke Petry, on her Facebook page.
"The creeping devaluation of their savings will continue in 2017, perhaps even accelerate."
A Forsa Institute opinion poll on Wednesday put support for the AfD at 12%, compared with the 37% support for Ms. Merkel's conservative parties and the 20% backing for the Social Democrats.
Last year's economic upswing was led by robust domestic consumption, in particular, government expenditure aimed at housing and training the more-than-1 million migrants who have entered the economy since 2015.
Government spending rose 4.2% in 2016 from 2015, according to Destatis. Household consumption increased 2%, while construction investment rose 3.1%.
A 2.5% rise in exports, meanwhile, was outstripped by a 3.4% increase in imports. Investment in plant and machinery was lackluster, up 1.7% from the 2015.
Economists warned that rising inflation, if left unchecked, would soon start eroding households' incomes and savings, as the European Central Bank isn't expected to raise interest rates in the near term. The ECB sets rates across the eurozone, of which Germany is a member.
The government must urgently address the problems caused by low rates to woo back voters from the AfD party, said the Christian Democrats' Mr. Linnemann.
"One approach is to implement a substantial tax reform from which people benefit notably," he said.
Robust growth has helped fill the government'scoffers. It generated a EUR6.2 billion budget surplus last year, the third surplus in a row. However, the finance ministry rejected calls to use the money for tax cuts, with Finance Minister Wolfgang Schäuble saying on Thursday he wanted to use it for debt redemption.
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(END) Dow Jones Newswires
January 12, 2017 15:55 ET (20:55 GMT)
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