UPDATE 2-Sputtering German trade engine points to modest growth
* Exports rise less than expected in August
* German BGA trade group slashes full-year forecast for exports
* Industrial orders dip 0.3 percent on lower foreign orders
* Data adds to picture of domestic demand-driven economy
By Sarah Marsh and Michelle Martin
BERLIN, Oct 8 (Reuters) - German exports rose less than hoped in August as foreign industry orders fell, adding to signs that domestic demand rather than trade activity will drive modest growth in Europe's leading economy this year.
Sales of goods and services abroad gained just 1.0 percent, Federal Statistics Office data showed on Tuesday, prompting a German trade group to slash its forecast for full-year export growth.
"We can't achieve 3 percent growth anymore. We now expect ... growth of less than one percent," Anton Boerner, the president of the BGA trade association, told Reuters, citing weakness in a slew of foreign markets.
Exports have been the cornerstone of the German economy in recent decades.
But Tuesday's news strengthened expectations that domestic demand, rather than trade, will drive growth this year, helped by a strong labour market, solid wage hikes and favourable financing conditions - good news for Germany's euro zone neighbours.
That picture was reinforced by economy ministry data showing industrial orders dipped 0.3 percent in August from July, also weaker than expected and driven by a 2.1 percent fall in foreign orders while domestic orders rose 2.2 percent.
The ministry said the sharp rise in German demand for capital goods suggested investment activity, which has been weighing on growth, was reviving.
The 1.0 percent rise in exports - outpacing an even more meagre 0.4 percent gain in imports - missed the consensus forecast of 1.5 percent in a Reuters poll. Exports had unexpectedly fallen in July.
"The (trade) data suggest that the recovery continues, but there is not that much momentum," said Holger Sandte at Nordea. "It confirmed effectively that foreign trade will not provide much of a boost, unlike private consumption."
Germany's economy, which steamed ahead during the early years of the euro zone crisis, weakened last year but bounced back in the second quarter of 2013. Economists generally expect slower but solid growth in the July-September period.
WEAKNESS BEYOND EUROPE TOO
Christian Schulz at Berenberg Bank noted that while August's export figures showed a pickup, data for the first months of the year showed that exports were lower than in 2012.
"Especially weak were exports to the euro zone, and this is where you see the impact of the recession," he said.
A breakdown of Tuesday's unadjusted data showed shipments to the euro zone, where Germany sends 40 percent of exports, dropping 4.1 percent on the year in August. They were down 3.1 percent on the year in the first eight months of 2013.
Germany continues to outpace peers within the currency bloc, which is struggling with its debt crisis. Earlier on Tuesday, the Bank of France cut its forecast for third quarter growth to 0.1 percent, while figures showed Spain's industrial output fell for the 24th straight month.
But exports to outside Europe were down even more in August on the year, dropping 7.2 percent, underscoring how sluggish global trade has failed this year to compensate for weak demand from the euro zone.
"Global trade remains off-colour, which is putting the brakes on German exports," said Thomas Gitzel at VP Bank. "The outlook for the coming months is much more promising. Important freight indicators have risen considerably."
Germany's BDI industry group last month slashed its forecast for export growth to between 1.5 and 2 percent from a previous estimate of 3.5 percent due to weakness in emerging markets.
The BDI said that while there were signs that the European economy was recovering and growth in the United States was stronger than expected, this was not sufficient to offset the current weakness of emerging markets.
Tuesday's data showing imports down 1.4 percent on the year in the first eight months of 2013 suggests that domestic demand might not provide as much of a boost to Germany's neighbours as hoped for nor contribute much to reducing euro zone imbalances.
The trade surplus widened more than expected in August to 15.6 billion euros from an upwardly revised 15 billion euros.
Imbalance between the euro zone's two top economies may however be shrinking.
France's Trade Minister Nicole Bricq said the trade deficit in August had narrowed slightly to 4.9 billion euros from the previous month, describing the rise as a positive trend that would carry through to year-end.
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