GDP records joint-sharpest contraction since Q1 2023 in the second quarter

Second reading reveals steeper contraction: GDP fell 0.3% on a seasonally adjusted quarter-on-quarter basis in Q2, below the 0.1% flash estimate and contrasting the 0.3% expansion seen in Q1. The reading marked the joint-largest contraction since Q1 2023. On an annual basis, GDP dropped 0.2% in Q2 from Q1’s flat reading.

Drivers: The downturn was driven by weakening private consumption, fixed investment and exports. Private consumption growth fell to 0.1% in Q2, marking the weakest expansion since Q4 2023 (Q1: +0.6% s.a. qoq), amid a slightly higher unemployment rate. Moreover, fixed investment contracted 1.4% in Q2, the worst result since Q2 2024 (Q1: +0.3% s.a. qoq), likely weighed on by tariff-related uncertainty. That said, government spending rebounded, growing 0.8% in Q2 (Q1: -0.3% s.a. qoq). On the external front, exports of goods and services worsened, contracting 0.1% in Q2 (Q1: +2.5% s.a. qoq) as the boost from frontloading to the U.S. faded. Conversely, imports of goods and services were stable at Q1’s 1.6% in Q2.

Economy to edge out of the doldrums in H2: Our Consensus is for the economy to avoid a technical recession in the remainder of the year. Recent ECB monetary policy easing and greater clarity regarding U.S.–EU trade policy should prompt a recovery in fixed investment. However, 15% U.S. tariffs will drag on the external sector. In 2025 as a whole, Germany’s economy should rebound timidly after two consecutive years of contraction. Stronger private consumption and fixed investment—supported by lower interest rates—are set to marginally outweigh headwinds from the protracted malaise in the key industrial sector and the tougher trade environment caused by U.S. tariffs. The economic impact of higher defense spending and U.S. tariffs are key factors to watch.

Panelist insight: ING’s Carsten Brzeski commented: “Looking ahead, the path for the German economy and industry will be particularly affected by trade, the exchange rate, and fiscal stimulus. In the near term, recent corporate results were already a painful reminder that US tariffs, but also structural transitions, were in full swing in the second quarter, weighing on company results. This is a trend that won't change too much in the third quarter, with US tariffs of 15% on most European goods and uncertainty over whether (and when) the 27.5% tariffs on automotives will be brought back to 15%. With 10% of total German exports going to the US, the new tariffs will weigh on economic growth.”

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