By Maria Martinez

The German economy should grow strongly in the third quarter but the recovery from the historic decline in economic output in the first half of the year will take some time, the Federal Ministry of Economic Affairs said.

"With the gradual easing of the restrictions, the German recovery process restarted in May," the ministry said in the latest monthly report. The further economic upturn depends to a large extent on the course of the coronavirus pandemic at home and abroad, the ministry said.

"Some of our trading partners' economies are still heavily impacted by the pandemic," the ministry said. "For this reason, after the first initial rebound in May and June, the recovery process of the German economy will only progress slowly and it will take a long time."

The German gross domestic product in the second quarter contracted 10.1% quarter-on-quarter. But the ministry sees with optimism that German companies are now "noticeably more confident." For the global economy, real-time indicators also point to a recovery in the course of the year.

The pandemic will remain a major factor of uncertainty. The most affected areas such as the U.S., South Africa and parts of Latin America are a cause of concern, the ministry said. There is also an increasing number of cases in the U.K., Russia, India and Sweden.

"This shows that the foreign trade environment for the German economy is likely to remain difficult for some time to come," the ministry said.

For now, however, the leading indicators for German exports point to a further recovery ahead, such as Ifo's export expectations for the manufacturing sector.

The recovery of production in the manufacturing sector continued strongly in June and manufacturing orders also indicated a significant rebound in industrial activity. However, given persistently weak foreign demand and the uncertainties of the course of the pandemic, the catching-up process in the manufacturing sector will take some time, the Ministry of Economic Affairs warned.

The ministry sees signs of stabilization in retail trade and in the labour market. Consumption has been rising significantly since May, as stores reopened. The 87.5% increase in new car registrations in July also shows the recovery process is likely to continue in the near future, the report said.

In the labor market, the ministry sees stabilization as a result of the widespread use of short-time work schemes and the revival of business activity. However, the demand for labour remains subdued. According to the ministry's assessment, companies are counting on a return to pre-crisis working hours before hiring new staff. But leading indicators indicate the stabilization of the labor market is likely to continue.

Write to Maria Martinez at maria.martinez@wsj.com

(END) Dow Jones Newswires

August 14, 2020 06:01 ET (10:01 GMT)