FRANKFURT, Nov 11 (Reuters) - German economic growth will accelerate this quarter as Europe's largest economy recovers faster than expected, even if deep structural challenges continue to hold it back, Bundesbank President Joachim Nagel said on Wednesday.
Germany, the world's third-biggest economy, has stagnated for most of the past three years as its vast industrial sector lost some of its competitive edge. A recovery has started to take hold this year, and a surge in government spending on defence and infrastructure has given it an additional boost.
"Our interim assessments point to a stronger recovery than we were expecting in the summer," Nagel told a conference in Riga. "Economic growth is likely to accelerate in the fourth quarter."
In June, the Bundesbank forecast economic growth in 2026 would be just 0.5%, but most major forecasters now see a growth rate of more than twice that and expect it to hold up in the coming years.
The real surprise this year was the recovery of manufacturing, especially chemicals and electrical equipment output, and order levels suggest that this trend is likely to continue, Nagel said.
"However, the recovery is not yet broad-based," Nagel added. "Private consumption remains subdued, and investment in machinery and equipment declined in the second quarter."
Nagel also noted that the potential growth rate of Germany remains especially low and deep structural changes are needed to lift this.
The country needs labour market reforms as its working age population is shrinking, it needs to work on transitioning its energy sector to carbon neutrality and must find ways to foster stronger private investment, Nagel said.
(Reporting by Balazs Koranyi; Editing by John Mair)