GDP returns to contract in Q2

GDP reading: According to a preliminary estimate, GDP contracted 0.1% on a seasonally and calendar-adjusted quarter-on-quarter basis in Q2, following the 0.3% expansion tallied in the first quarter. This was the first contraction in a year. On an annual basis, GDP growth flatlined for the second consecutive quarter.

Investment likely caused GDP contraction: In the absence of a complete breakdown, the statistical office stated that Germany’s sequential contraction was driven by reduced investment in machinery, equipment and construction. That said, the statistical authority noted that household and government final consumption expenditure increased, cushioning the fall; households likely benefited from past ECB interest rate cuts. A complete breakdown will be released on 22 August.

GDP outlook: Our panel forecasts the economy to stagnate in Q3. Expansionary fiscal and monetary policy should underpin improvements in private consumption and fixed investment. That said, 15% U.S. tariffs will likely weigh on the external sector. In 2025 as a whole, Germany’s economy should mildly rebound after two consecutive years of contraction. Stronger private consumption and fixed investment—supported by lower interest rates—should only marginally outweigh headwinds from the protracted malaise in the key industrial sector and the tougher trade environment. The economic impact of higher defense spending is a key factor to watch.

Panelist insight: Commenting on the outlook, EIU analysts stated: “The outlook for the remainder of the forecast period is stronger, with the passing of major debt-brake reforms and a pro-investment 2025 budget underscoring the government's commitment to supporting growth through investment promotion, particularly in infrastructure (which typically has a notable fiscal multiplier effect), as well as raising defence spending.”

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