German economy grows 0.3% as trade lifts second quarter

The German economy grew 0.3% in the second quarter, stronger than first reported, as trade helped extend a tentative recovery after years of weak momentum.

Destatis revised April-to-June output up from an initial 0.2% estimate, putting quarterly growth 0.1 percentage point higher than first calculated. The revision gave Germany three consecutive quarters of expansion, its longest run since the end of the pandemic, according to the statistics office.

Trade lifts second-quarter output

The stronger reading gives Chancellor Friedrich Merz some economic support before three state elections that will test his government’s standing. Merz, who took office last year, has backed higher military and infrastructure spending while pressing for economic reforms.

Trade was the decisive support in the second-quarter revision, according to Destatis. That matters for Germany because its export-heavy industrial model had been strained by higher energy costs, faster inflation and the higher interest rates that followed the Iran war.

The ifo business expectations index rose to 89.1, its highest level since before the Iran war, the institute said. “The German economy is recovering,” ifo President Clemens Fuest said in a statement. “Companies were more satisfied with their current situation, and they revised their expectations significantly upward.”

Factories get defense support

Recent indicators have added to the case that the downturn is easing, though the recovery remains narrow. Manufacturing activity has reached its highest level in more than four years, helped by larger defense outlays, while the benchmark DAX index climbed to a record in August.

The political backdrop is less settled than the data. The far-right Alternative for Germany has used the country’s industrial weakness as a campaign theme, and pressure on Merz’s coalition has not eased even as headline figures improve.

Volkswagen AG remains a visible pressure point for the industrial economy. Labor representatives at the carmaker warned Tuesday that planned job cuts could eventually affect as many as 140,000 positions, a single-company figure that would deepen concern about Germany’s manufacturing base if it materializes.

The drought affecting key transport waterways is another constraint. Low river levels can raise shipping costs and slow deliveries for chemicals, autos and heavy industry, limiting how quickly stronger orders turn into production.

Two paths for recovery

If trade remains supportive and defense and infrastructure spending continues reaching suppliers, Germany would add a modest stabilizer to European demand. Under that path, Volkswagen would face a less hostile domestic market while negotiating labor changes, and manufacturers tied to capital goods, defense and construction could see fuller order books.

If the trade lift fades, financing costs stay restrictive or waterway disruption worsens, the recovery would look more fragile. The macro effect would be weaker euro-area demand, Volkswagen’s restructuring would meet a tougher sales and political backdrop, and the wider industrial sector would remain exposed to uneven orders and high fixed costs.

The main open question is whether the improvement in confidence turns into investment and hiring. For now, the second-quarter revision and the 89.1 ifo expectations reading show that Germany’s economy is no longer only producing weak data, even if the next phase depends on trade, public spending and industrial costs moving in the same direction.