By Nina Adam 

FRANKFURT--Germany's economy slowed in the second quarter after a strong start to the year, owing to a drop in investment, as other parts of the eurozone also shifted down a gear.

Germany's gross domestic product grew at a quarterly rate of 0.4%, or an annualized rate of 1.7%, the Federal Statistical Office, Destatis, said Wednesday. It marks a significant slowdown from the first quarter, when the economy expanded at a quarterly clip of 0.7%, as the mild winter weather propelled construction. The outcome is in line with an earlier GDP flash estimate.

But Germany's economy slightly outpaced the eurozone, which saw its quarterly growth rate ease to 0.3% from 0.6% in the first three months of the year, according to official data published earlier in August.

Most private-sector analysts expect that Germany will stay on a steady but moderate growth path in the second half of the year, as the U.K.'s pending exit from the European Union adds to an uncertain outlook for exports and investment.

"The economy's Achilles' heel remains the lack of investment--from both businesses and the government," said Carsten Brzeski, an economist at ING in Frankfurt. "A greater initiative is needed from the government," he said, adding that Germany should use its financial wiggle room to invest more in its roads, public transport and new infrastructure, including high-speed internet.

Illustrating this trend, foreign trade and consumption propped up Germany's economy in the second quarter, while weak investment weighed on growth.

Destatis said construction investment dropped by 1.6% from the preceding quarter, while investment in machinery and equipment slumped by 2.4%, erasing a 1.2% gain in the first quarter. German exports rose by 1.2%, but a 0.1% quarterly drop in imports signaled slack domestic investment.

Destatis also reported a 0.6% rise in public consumption in the second quarter, as the federal and local government faced rising costs related to last year's record influx of migrants. A buoyant labor market and low energy prices, meanwhile, underpinned household consumption, which grew 0.2% from the preceding quarter.

Compared with the second quarter of 2015, Germany's GDP was up 1.8%, taking account of calendar effects. The annual rate also matched a flash estimate from Aug. 12.

Solid growth and a strong labor market also helped fuel government coffers. Destatis, in a separate news release, said Wednesday that Germany in the first half of 2016 registered a 1.2% of GDP surplus in its national budget, which comprises the budgets of the federal government, state governments, local governments and social security funds. But it cautioned against drawing conclusions for the full year, as the budget surplus tends to be lower in the second half of the year. Chancellor Angela Merkel's government expects a balanced national budget for this year.

The federal government alone saw a budget surplus of EUR9.7 billion ($11 billion) in the first half of the year. But the finance ministry said Wednesday that finances will probably be less favorable in the second half because of planned extra spending for the support of Syrian refugees and costs related to accommodating and integrating the well over one million migrants who have arrived in Germany since early last year.

Andrea Thomas in Berlin contributed to this article.

Write to Nina Adam at nina.adam@wsj.com

(END) Dow Jones Newswires

August 24, 2016 05:50 ET (09:50 GMT)

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