Germany’s Economy Contracted By 0.3% in Q2 2025, Down From Preliminary Estimate of 0.1%

The German economy contracted by 0.3% in Q2 2025, revised down from a preliminary estimate of 0.1%, signaling a deeper-than-expected slowdown.

This follows a 0.3% growth in Q1, with the downturn driven by declines in investment (down 1.4%, particularly in machinery and equipment), construction (-3.7%), and manufacturing (-0.3%). Exports fell 0.1%, while imports rose 1.6%, further weighing on GDP.

Household consumption edged up 0.1%, and government spending increased 0.8%, offering some support. On an annual basis, GDP grew by 0.2% after calendar adjustments. The contraction reflects ongoing challenges, including U.S. tariffs (a 10% baseline tariff effective April 5, 2025), weak global demand, high energy costs, and tighter financing conditions.

Germany risks a third consecutive year of economic contraction, a rare occurrence in its post-war history. Persistent issues like high energy costs, weak global demand, and new U.S. tariffs (10% baseline effective April 5, 2025) could deepen this trend, delaying recovery until 2026.

Sharp declines in investment (-1.4%), particularly in machinery, equipment, and construction (-3.7%), signal reduced business confidence and capacity for growth. Manufacturing’s 0.3% drop underscores Germany’s vulnerability as an export-driven economy amid global trade disruptions.

A 0.1% fall in exports, coupled with a 1.6% rise in imports, worsens the trade balance, a critical driver of German GDP. This could strain the current account surplus and exacerbate economic fragility. While household consumption (+0.1%) and government spending (+0.8%) provided some cushion, their modest gains are insufficient to offset broader declines.

Rising borrowing costs and inflation may further constrain consumer and public spending. The government’s planned infrastructure investments and tax incentives face hurdles from coalition disagreements and fiscal constraints. Without robust reforms, these measures may fall short of sparking a turnaround.

As the Eurozone’s largest economy, Germany’s downturn could drag regional growth, potentially pressuring the European Central Bank to adjust monetary policy, though high interest rates to curb inflation limit options. Prolonged stagnation may fuel public discontent, strengthening populist parties and complicating governance, especially with coalition tensions already evident.

Analysts, including ING’s Carsten Brzeski, see no quick fix, with structural issues like energy transition costs and global trade shifts posing long-term challenges. Germany’s ability to navigate these will determine the pace of recovery.

Germany, accounting for roughly 28% of Eurozone GDP, acts as a key economic engine. Its downturn could lower Eurozone growth projections, potentially pushing the region closer to stagnation or recession. Smaller, export-dependent economies like Austria, Belgium, and the Netherlands, closely tied to German supply chains, are particularly vulnerable.

Germany’s 0.1% export decline and 1.6% import rise weaken intra-Eurozone trade dynamics. Reduced German demand for goods from other member states could hurt economies like Italy and Spain, which rely on exports to Germany, exacerbating regional imbalances.

The European Central Bank (ECB) faces a dilemma. Germany’s contraction signals a need for looser monetary policy to stimulate growth, but persistent Eurozone inflation (driven by energy costs and supply chain issues) may limit rate cuts. This could delay recovery across the region.

Germany’s fiscal constraints and coalition disputes over stimulus measures could limit its ability to lead Eurozone recovery efforts. This puts pressure on other major economies like France and Italy to boost spending, despite their own high debt levels, potentially straining EU fiscal rules.

A weaker German economy could depress the euro’s value, increasing import costs (e.g., energy) across the Eurozone. Stock markets, particularly in export-heavy sectors, may face volatility as investor confidence wanes.

Germany’s prolonged stagnation could fuel populist sentiment, influencing Eurozone politics. Rising political fragmentation in Germany and beyond may complicate coordinated EU responses to economic challenges.

Analysts suggest the Eurozone’s 2025 growth, already projected at a modest 0.8-1.2% by institutions like the IMF, could be revised downward if Germany’s slump persists. The region’s recovery hinges on Germany addressing structural issues and external shocks like trade tariffs and energy costs.