German Economy Shrinks 0.3% in Q2 as U.S. Tariffs Hit Exports, Growth Outlook Weakens

Germany’s economy contracted by 0.3% in the second quarter of 2025, according to revised data from the Federal Statistics Office, deepening concerns about Europe’s largest economy. The figure marks a sharper decline than the initial estimate of 0.1%, largely driven by slowing demand from the United States after months of stockpiling ahead of U.S. tariffs. Analysts now believe that a meaningful recovery may not materialize before 2026.

The contraction reinforces Germany’s position as the only G7 economy that has failed to achieve growth for two consecutive years, raising the risk of a historic third year of recession. Trade tensions with Washington remain a key threat, especially after President Donald Trump implemented a baseline tariff of 10% on April 5, with additional duties potentially on the horizon. Economists warn that these measures could further weaken Germany’s export-driven economy.

In response, Berlin has introduced an “investment booster” program to stimulate growth. The package includes improved depreciation options for companies, commitments to boost defense and infrastructure spending, and a reduction in corporate tax rates. However, the Economy Ministry admitted that these steps are insufficient. “More is needed to make Germany competitive again and put it back on track for growth,” a spokesperson told Reuters.

Key economic indicators paint a challenging picture. Industrial production underperformed earlier assumptions, while household consumption barely grew, up just 0.1%. Investments dropped by 1.4%, and exports of goods and services fell 0.1% compared to the previous quarter. Government spending was one of the few bright spots, rising 0.8%, but overall trade delivered no positive contributions. Despite a recent EU-U.S. trade framework deal, full implementation remains pending, especially on automotive carve-outs.

Looking ahead, economists expect only a modest recovery. A recent uptick in manufacturing orders, reflected in the HCOB Flash Germany Composite PMI, offers some optimism. Additionally, the European Central Bank’s rate cuts and a more expansionary fiscal stance could support growth. Still, structural challenges and higher U.S. tariffs will likely limit any rebound, said Ralph Solveen of Commerzbank. “This upturn is likely to be only moderate,” he added.

Source: Reuters