BERLIN, (Reuters) - The German economy had a good start to the second quarter and its upswing is likely to continue albeit at a slower pace than in the first three months of the year, the Finance Ministry said on Monday.

Europe's largest economy grew 0.7 per cent between January and March, its strongest quarterly rate in two years, as soaring private consumption, higher construction investment and state spending on migrants more than offset weak foreign trade.

The government expects domestic demand to drive an overall economic expansion of 1.7 per cent in 2016, on a par with last year.

"The German economy had a good start to the second quarter,"the ministry said in its monthly report. "Economic indicators overall suggest a continuation of the economic upswing, albeit at a less dynamic pace than at the beginning of the year."

Rising employment, higher wages and low interest rates are boosting the purchasing power of German consumers, the ministry said, adding: "Altogether, the conditions for private consumption remain good."

The resulting strong domestic demand is pushing up the state's tax income, with overall revenues up nearly 6 per cent on the year in first five months of 2016, the finance ministry said.

Buoyant tax revenues were enabling Finance Minister Wolfgang Schaeuble to increase state spending on migrants and infrastructure while keeping a balanced budget.

Turning to foreign trade, the ministry said exports were still growing thanks to strong demand from European Union countries which was cushioning the effect of weaker demand from emerging markets such as China, Brasil and Russia.

"Nevertheless, trade-related risks remain, especially with regard to the still sluggish development of the world economy,"it added.