By Joseph Nasr and Michael Nienaber
BERLIN (Reuters) - German retail sales rose at their fastest pace in more than five years in October, data showed on Wednesday, reinforcing expectations that private consumption will propel growth in Europe's largest economy in the fourth quarter.
But the positive effects of private consumption are likely to wane next year, as rising consumer prices and weaker wage increases are expected to discourage Germans from spending.
In addition, the outlook for German exports is clouded by uncertainty linked to Britain's vote to leave the European Union and the election of Donald Trump as U.S. president, who could pursue a protectionist trade agenda.
"The German economy remains on a good path but the outlook for 2017 leads to a foggy environment in which the ship could go slightly off course," KfW economist Joerg Zeuner wrote in a note to clients.
The construction sector, which has also been providing impetus for the economy as exports weaken, will also witness a slowdown next year, Zeuner added.
Retail sales rose by 2.4 percent on the month in real terms, the Federal Statistics Office said, the highest increase since June 2011 and more than double the forecast in a Reuters poll for a 1.0 percent rise.
A breakdown of the data suggested that the rise was mainly driven by growth in e-commerce as well as clothing and shoes sales as winter and Christmas approach.
The data, which is often subject to revisions, supports expectations that the economy will grow 0.5 percent in the last quarter, after growth halved to 0.2 percent in the July-Sept. period.
Germany is benefiting from record high employment, which is boosting household spending and government tax receipts. The European Central Bank's expansive monetary policy is also encouraging consumer and state spending.
UNEMPLOYMENT FALLS
Unemployment fell for the 16th consecutive month in November and the jobless rate remained at a record low, data from the Federal Labour Office showed on Wednesday.
The economy is benefiting from increased state spending, mainly to accommodate a record number of more than one million migrants who entered the country since the beginning of 2015.
Bayern LB economist Stefan Kipar said there is no indication that the new arrivals were fuelling unemployment among locals.
"Given the high number of job vacancies, the preconditions for managing the integration into the labor market remain relatively good," Kipar added.
The government has also raised funding for urgently needed maintenance work on infrastructure such as schools, bridges and highways.
Chancellor Angela Merkel's cabinet passed a draft law on Wednesday to increase investment in school building renovation, doubling its contribution to a municipal fund to a total of 7 billion euros ($7.5 billion).