Germany's economy has fallen back into recessionary territory, with the latest GDP data revealing a sharper-than-expected contraction in the second quarter of 2025, according to ING's latest economic analysis.
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After expanding by 0.3% quarter-on-quarter in Q1, GDP shrank by 0.3% in Q2—a steeper decline than the initial estimate of -0.1%. On a yearly basis, the economy grew by just 0.2%, seasonally and calendar-adjusted. ING noted that, following significant data revisions, "the size of the German economy is currently still slightly below its 2019 level, probably the best and most painful illustration of stagnation."
Key drags on activity included investments, the construction sector, and net exports, while consumption and inventories provided only limited support. The downturn also reflects a reversal of the first-quarter boost from US front-loading of German exports, compounded by the "first full-blown impact of US tariffs (implemented in the second quarter)."
Despite these pressures, business optimism remains unexpectedly resilient. ING observed: "It is still unclear where this optimism is exactly coming from. Is it due to fiscal stimulus, a less benign take on US tariffs, or signs that the turning of the inventory cycle… will pick up steam again? Possible, but definitely not a done deal."
Looking ahead, the economic path remains uncertain. The analysis warns that US tariffs—currently at 15% on most European goods, with a potential 27.5% on automotives—will continue to weigh heavily on growth, particularly for the export-reliant Mittelstand, which faces greater challenges relocating production than larger corporations.
Adding to these challenges, the euro's strength against major currencies further complicates export competitiveness. ING cautioned that "it is hard to see how the export-dependent German economy will be able to get out of seemingly never-ending stagnation in the second half of the year."
Domestic debates over fiscal stimulus versus austerity measures could also dampen investment and spending. "The longer a debate on potential austerity measures lasts, the higher the risk that households and companies will hold back spending and investment decisions – a risk factor that financial markets seem to have missed so far," ING added.
While infrastructure and defence spending plans may provide some support, ING concludes that a substantial recovery is unlikely before 2026, as structural challenges and external pressures keep the economy "too comfortable in stagnation."
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