BERLIN, Aug 22 (Reuters) – Germany’s economy contracted by 0.3% in the second quarter compared to the first quarter of the year, as export demand from the United States weakened following a surge in advance purchases ahead of new U.S. tariffs.
The Federal Statistical Office revised its earlier estimate of a 0.1% decline, reinforcing concerns that Europe’s largest economy may not see a meaningful rebound in 2025.
“It is becoming less and less probable that a significant recovery will occur before 2026,” noted Carsten Brzeski, ING’s global head of macroeconomics.
Germany stands as the only G7 nation that has not recorded growth over the past two years. Escalating trade tensions raise the possibility of a third consecutive year of economic contraction, an unprecedented scenario in the country’s post-war history.
Revitalizing economic momentum is a key objective for the newly formed government, particularly amid concerns that former U.S. President Donald Trump’s tariff policies could further strain the export-reliant economy. A baseline tariff of 10% was implemented on April 5.
To counteract the downturn, the German government has introduced an “investment booster” initiative, offering enhanced depreciation benefits for businesses, alongside commitments to increase spending on defense and infrastructure and reduce corporate tax rates.
However, officials acknowledge that more action is required.
“The measures approved so far are insufficient. Additional steps are essential to restore Germany’s competitiveness and set the economy on a sustainable growth path,” a spokesperson for the Economy Ministry told Reuters in response to the latest figures.
Industrial output performed worse than initially projected, according to updated data. Household consumption was revised down to a 0.1% increase in the second quarter, reflecting new data from service sectors including accommodation and food services for June. Government expenditure rose 0.8% from the prior quarter, while investment dropped sharply by 1.4%.
Foreign trade offered no support. Exports of goods and services declined by 0.1% in the second quarter.
Although the EU and U.S. agreed on a trade framework in late July, only a 15% baseline tariff has been enacted. The EU continues to await executive orders from the White House detailing exemptions, particularly for the automotive sector.
The U.S. remained Germany’s largest trading partner in 2024, with bilateral goods trade totaling 253 billion euros ($293 billion).
On a more positive note, private sector activity showed modest improvement in August, driven by manufacturing orders, according to the HCOB Flash Germany Composite Purchasing Managers Index released Thursday.
“Growth is expected to resume in the coming quarters, supported by European Central Bank rate reductions and a notably more expansionary fiscal stance,” said Ralph Solveen, senior economist at Commerzbank.
“Nonetheless, the recovery is likely to remain modest due to structural challenges within the German economy and the increased U.S. tariff burden,” Solveen added. ($1 = 0.8628 euros)
— News Original —
German economy shrank 0.3% in second quarter as US tariffs slowed exports
BERLIN, Aug 22 (Reuters) – Germany ‘s economy shrank by 0.3% in the second quarter compared with the first three months of the year, as demand from its top trading partner the United States slowed following months of buying ahead in anticipation of U.S. tariffs. n nThe statistics office revised on Friday its preliminary reading of a 0.1% contraction, further dimming expectations of a sustained recovery by Europe ‘s biggest economy this year. n nSign up here. n n”It looks increasingly unlikely that any substantial recovery will materialise before 2026,” said Carsten Brzeski, global head of macroeconomics at ING. n nGermany was the only member of the G7 advanced economies that failed to grow for the last two years and trade tensions could put it on track for a third year of recession for the first time in post-war German history. n nReviving the economy is a top priority for Germany ‘s new government, especially given fears U.S. President Donald Trump ‘s tariffs could cause further pain for the export-driven economy. A baseline U.S. tariff of 10% came into effect on April 5. n nThe German government has approved an “investment booster”, which offers improved depreciation options for companies, and promised extra defence and infrastructure spending as well as a reduction in corporation tax. n nFurther measures will be necessary, the Economy Ministry said. n n”What has been decided so far is not enough, more is needed to make Germany competitive again and put it back on track for growth,” a ministry spokesperson told Reuters when asked to comment on Friday ‘s data. n nEXPORTS FALL 0.1% n nIndustrial production, in particular, performed worse than initially assumed, the statistics office said. n nHousehold consumption in the second quarter was revised downwards to a 0.1% increase due to new information available on the services sectors, such as monthly statistics of accommodation and food services for June. n nGovernment spending increased by 0.8% on the previous quarter, the statistics office said. Investment decreased significantly in the second quarter, sliding 1.4%. n nNo positive contributions came from foreign trade either. In the second quarter, total exports of goods and services were down 0.1% from the previous quarter. n nThe EU and the U.S. struck a framework trade deal in late July but only the baseline tariff of 15% has so far been implemented. The EU is still waiting for the White House to issue executive orders to cover carve-outs, such as on the automotive industry. n nThe U.S. was Germany ‘s biggest trading partner in 2024, with two-way goods trade of 253 billion euros ($293 billion). n nIn some brighter economic news, the private sector saw a slight uptick in growth in August, driven by manufacturing, which experienced a rise in orders, the HCOB Flash Germany Composite Purchasing Managers Index showed on Thursday. n nThe economy will pick up in the coming quarters in view of the European Central Bank ‘s interest rate cuts and a significantly more expansionary fiscal policy, said Ralph Solveen, senior economist at Commerzbank. n n”However, this upturn is likely to be only moderate due to the structural problems of the German economy and the significantly higher U.S. tariffs,” Solveen said. ($1 = 0.8628 euros) n nAdditional reporting by Rachel More Editing by Ludwig Burger and Helen Popper