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BERLIN: The German economy is facing increased headwinds from abroad and this is fuelling business uncertainty, the finance ministry said on Thursday, adding that the so far robust labour market is showing first signs of cooling.

Export-oriented manufacturers in Europe's largest economy are suffering from weaker foreign demand, growing trade tensions and uncertainty over Brexit.

"External risks have increased significantly and are fuelling business uncertainty," the finance ministry said in its monthly report, adding that early indicators pointed to a sustained slowdown in the industrial sector.

Record-high employment, inflation-busting pay hikes and low borrowing costs have supported Germany's domestic economy so far, with household spending and construction providing a certain buffer against external shocks.

"The labour market situation is still favourable, but employment growth is slowing," the ministry cautioned. Forward-looking indicators were pointing to a further slowdown in employment growth, especially in manufacturing.

The economy contracted by 0.1% quarter-on-quarter from April to June. The Bundesbank warned on Monday that overall economic output could have continued to shrink over the summer, raising the spectre of a technical recession.

The finance ministry said tax revenues of the federal government and the 16 regional states rose 2.3% year-on-year from January to July. That was slightly below the projected rise of 2.4% for the whole year.

The sluggish tax take could complicate Finance Minister Olaf Scholz's efforts to keep the federal government's budget balanced, increasing the pressure to ditch the self-imposed policy goal of not taking on new debt.

Copyright Reuters, 2019