UPDATE 3-Germany's economy stagnates in third quarter as exports fall

Germany's gross domestic product stagnated in the third quarter, data showed on Thursday, highlighting the struggle Europe's biggest economy faces in regaining momentum as exports dwindle. The GDP stagnation was in line with forecasts, preliminary data from the statistics office showed, after Germany's economy shrank by 0.3% in the previous quarter as weak global demand and U.S. import tariffs weighed on exports.

Germany was spared a recession - defined as two consecutive quarters of negative growth - thanks to rising corporate investment, especially in equipment, Germany's Federal Statistical Office said. "The U.S. tariff shock and intense competition with China will continue to make things difficult for export-oriented industries," said Alexander Krueger, chief economist at Hauck Aufhaeuser Lampe.

POLICY RESPONSE slightly raised its growth forecast for this year to 0.2%, as well as predicting 1.3% growth in 2026 and 1.4% growth in 2027.

Hopes for growth have been fuelled mainly by German Chancellor Friedrich Merz's promise of a sharp rise in infrastructure and defence spending. But those measures are taking longer than expected to translate into better conditions on the ground. "The German government's fiscal package is not expected to boost the economy until next year, but this will not be sustainable due to the lack of reforms," Commerzbank chief economist Joerg Kraemer said.

Persistently high unemployment, which hit 3.02 million in August - its highest in a decade - is an added concern. The number of people out of work unexpectedly declined slightly in October, labour office figures showed on Thursday, slipping by about 1,000 to 2.973 million - an unchanged seasonally-adjusted rate of 6.3%.

Labour Office head Andrea Nahles cautioned against undue optimism, however, saying that employment growth remained weak. "Overall, the autumn recovery has been sluggish so far," she said in a statement.

Consumer sentiment remains fragile, weighed down by inflation and worries over job security, with a corresponding indicator from GfK dropping to -24.1 points for November, according to data from Tuesday. FRAGILE SPENDING POWER

Helena Melnikov, the head of the German Chamber of Industry and Commerce (DIHK), pointed to high costs and excessive bureaucracy as factors that are holding back recovery. "These are poor conditions for asserting oneself in a foreign trade environment that has become more challenging," she said.

A further dent to spending power is being dealt by persistently high inflation, though preliminary data from the national statistics office showed a slight easing to 2.3% year on year in October. Analysts polled by Reuters had forecast EU-harmonised inflation slowing to 2.2% from last month's 2.4%.