German economy slows as Rhine disruption hits this quarter

The German economy will slow from at least 0.3% growth to only slight expansion in the third quarter, the Bundesbank said Monday.

The central bank’s monthly report said gross domestic product had risen by 0.3% or more in each of the first two quarters. The July–September period is expected to be weaker, but the Bundesbank described the loss of pace as tied to short-lived factors rather than a stalled recovery.

Rhine levels hit summer output

One drag cited by the Bundesbank was low water levels on the Rhine, a recurring pressure point for German industry when shipping conditions worsen. The report framed the river disruption as temporary, with output expected to recover once the constraint fades.

As soon as they subside, catch-up effects should begin, the Bundesbank said in the report. It added that growth is expected to be stronger in the fourth quarter and that the economy will remain on its current path to recovery.

Germany, the largest economy in Europe, has shown more resilience than many forecasters expected after the Middle East war and the jump in energy costs. Higher infrastructure and defense spending have also helped cushion demand, according to the central bank’s assessment.

Energy and trade risks remain

The expected fourth-quarter rebound does not remove the main pressures on German activity. Elevated oil and gas prices remain a cost risk for households and manufacturers, while US trade policies continue to weigh on an export-led economy.

Domestic politics add another constraint. Recent state-election gains by extremist parties have increased pressure on Chancellor Friedrich Merz’s government, which is trying to hold together a reform agenda while managing divisions inside the coalition.

Marcel Fratzscher, president of the Berlin-based German Institute for Economic Research, said those divisions could produce paralysis. He argued that the government’s approach has leaned too heavily on protecting existing industrial structures through subsidies.

The approach so far has been, let’s not rock the boat, let’s try to preserve industry, let’s give them as many subsidies as necessary to keep them afloat, Fratzscher said. And that strategy no longer works.

Fratzscher said the central test is whether the government can shift toward tax changes, stronger competition and deeper structural reform. He also said policymakers may have to accept that parts of industry will shrink as the economy adjusts.

Recovery depends on policy choices

If the Rhine disruption and other one-off drags ease, the Bundesbank’s fourth-quarter view points to a clearer rebound in German output. That path would support euro-area growth, help German companies rebuild delayed activity and give manufacturers a steadier base heading into next year.

If energy costs stay elevated or US trade measures tighten, the recovery would be more exposed. Higher input costs can squeeze corporate margins, while weaker external demand would hit exporters and suppliers across machinery, chemicals and autos.

The policy path will shape which scenario carries more weight. A government that advances tax and competition reforms could improve investment incentives, but a coalition stuck in dispute would leave companies facing the same cost and demand pressures with fewer offsets.

The next test is whether the third-quarter slowdown remains as limited as the Bundesbank expects. A stronger fourth quarter would support the central bank’s recovery case; a weaker one would put more attention on energy prices, trade policy and Berlin’s reform capacity.