The German economy will lose steam in the second half of 2016 as weaker foreign demand causes industrial output to slow, the Finance Ministry said on Thursday, another signal that Europe's biggest economy is set for a slowdown.

Strong private consumption, higher state spending and rising construction activity helped the economy to grow by 0.7 percent in the first quarter and by 0.4 percent in the second.

"German economic growth was robust in the first half of the year," the Finance Ministry said in its monthly report. "But the latest economic data indicate a slowdown in economic momentum in the second half of the year."

Growth in industrial orders nearly halted in July and factory output and exports unexpectedly fell, suggesting manufacturing started the third quarter on a weak footing.

"The reason for the low industrial activity is sluggish foreign demand," the ministry said, adding that it expected subdued factory output for the rest of the year.

The economy will continue to grow, however, as private consumption is boosted by record-high employment, rising real wages, low inflation and relatively cheap energy, it said. "The economic upswing remains intact."

Germany's vibrant domestic economic activity is pushing up tax income, with the revenues of the federal government and the 16 states up 4.1 percent on the year in the first eight months of 2016, the ministry said. That is above the projected rise of 3.0 percent for the whole year.

The buoyant tax revenue is enabling Finance Minister Wolfgang Schaeuble to increase state spending on migrants, roads and digital infrastructure without taking on new debt, meaning he can stick to his cherished but internationally controversial goal of a balanced budget before federal elections next year.