Germany’s Economy Contracts Sharper Than Expected

Germany’s economy slipped back into contraction in the second quarter, shrinking 0.3% quarter-on-quarter, a deeper decline than the earlier estimate of 0.1%. 

The downturn follows a temporary boost in the first quarter when firms accelerated exports to the US to beat incoming tariffs under President Trump’s trade policy.

Industrial production was notably weaker than forecast, while household consumption slowed to just 0.1%. Government spending provided a modest offset, rising 0.8%, but investment, construction, and net exports all declined. Annual GDP growth for the second quarter eased to 0.2%, down from 0.3% in the first three months of the year.

The tariff environment is weighing heavily, with 15% levies now applied on most European goods exported to the US and uncertainty over whether a steeper 27.5% tariff on autos will be reimposed. Given that 10% of Germany’s exports are US-bound, these measures represent a significant drag on growth.

Markets did find some optimism in August PMI data, which showed business activity expanding for the third consecutive month, albeit modestly. 

What Does This Mean for Me?

Investors are also watching the German government’s fiscal stance. A constitutional amendment has lifted limits on defence spending above 1% of GDP, while a €500 billion off-budget fund is earmarked for infrastructure. These moves could provide some buffer against external shocks.

With growth momentum fragile, the risk of another weak quarter looms large unless trade negotiations between Washington and Brussels yield tangible progress.