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German economy shrank 0.3% in the second quarter, a sharper contraction than previously estimated, according to official data released Friday.
The July flash estimate originally pointed to a 0.1% contraction during the April-July period. Friday’s revision reflects a deeper slump in manufacturing and investment than initially thought.
Germany has been pushed back “to recession territory,” ING’s macro world leader Carsten Brzeski wrote in a note after its release on Friday. “It seems increasingly unlikely that a substantial recovery will occur before 2026.”
The second quarter decline (largest in a year) offset better performance than expected in the first three months when Europe’s largest economy rose 0.3%, as exports to the US rose sharply in anticipation of tariffs by US President Donald Trump.
Germany’s GDP has signed in six of the last 10 quarters and is hovering at the 2019 level.
Economy Minister Katharina Reihy said the latest data “emphasizes the need for action,” and there is a need for “deep and bold structural reforms” that include more flexible rules on working hours, reduced deficits, and non-wage labor costs and energy prices.
Prime Minister Friedrich Merz has pledged to ease Germany’s strict debt brakes and embark on investments with 10 euros of debt funds over the next few years.
Commerzbank economist Ralph Solveen pointed to the positive impact from European Central Bank interest rates, half of 2% in the past 12 months and halved by 2% from Germany’s upcoming fiscal expansion.
However, he also warned that if recovery occurs in the coming months, it will be “very modest.”
Following the US EU trade agreement agreed in late July, traders have reduced expectations for further interest rate cuts by the ECB this year. They are currently priced below 50% chance for another quarter point reduction by December.
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ECB president Christine Lagarde warned on Wednesday that it has helped push US tariffs to rush exports at the start of the year to “now reversal.”
“The expected slowdown in growth in the Euro region was already evident in the second quarter of this year,” she said during a panel discussion in Geneva.
German goods exports fell 0.6% in the second quarter. Capital investments fell 1.9%, driven in part by a sharp decline in corporate vehicle purchases. Construction fell 2.1%.
This slump was partially offset by a 0.8% increase in government consumption and a 0.1% increase in private consumption.
“The decline in investment was much stronger than we expected,” said Melanie Debono, an analyst at Pantheon Macroeconomics.
