German economic decline worsens in the second quarter
Back to the danger zone. As feared, the second estimate of Germany’s second quarter GDP data saw the biggest economy of the Euro zone falling back into a worse contraction.
After the surge of 0.3% quarter-to-quarter in the first quarter, the German economy shrank 0.3% in the second (the initial estimation showed a decrease in qoq 0.1%). In that year, the economy rose 0.2%, seasonal and adjusted to the calendar. While investment, construction sector and net exports are significant obstacles to economic activities, private and public consumption, as well as inventory, supported activities. A little ignored in the first release is the fact that statistical agents have significantly revised down the official GDP numbers for 2023 and 2024
Optimism alone does not restore growth
Today’s GDP release shows the new wave of optimism which has captured the German economy in the first months of this year not yet displayed in the data. In fact, after the surge in economic activities resulting from the front loading of the US from German exports in the first quarter, the economy experienced a reversal of the front loading effect, and the first full impact of the US tariff (implemented in the second quarter) applies.
However, as illustrated by PMI data yesterday, at least business optimism seems to be hardly solved. It is still unclear where this optimism comes from. Is that because of fiscal stimulus, less docile tariffs take the tariff, or signs that the change of inventory cycle that we see at the beginning of the year will take more steam? Maybe, but clearly not an agreement made. Narration of the turn inventory cycle seeing a new setback with disappointing industrial data.
Waiting for substantial recovery to continue
In the future, the German economic and industrial paths will be greatly influenced by trade, exchange rates, and fiscal stimulus. In the near future, the results of this new company have become a painful reminder that the US tariff, but also a structural transition, runs smoothly in the second quarter, weighing the company’s results. This is a trend that will not change too much in the third quarter, with a US rate of 15% on most European goods and uncertainty about whether (and when) the 27.5% tariff on the automotive will be brought back to 15%. With 10% of the total exports of Germany to the US, new tariffs will burden economic growth.
While the financial market seems to have become numb for the tariff announcement, don’t forget that the bad effect on the economy will gradually be revealed from time to time. Mittelstand Germany can be a victim of US tariffs, because this hidden champion will have more difficulties to relocate production than large companies. Add to the euro exchange rate which is stronger only to the US dollar, but many other currencies are difficult to see how the German economy that depends on exports will come out of stagnation that seems to never end in the second half of this year.
All of this reduces hopes for fiscal stimulus, company investment and innovation that restore growth. In this case, the current political debate in Germany about the possibility of saving steps can damage – at least psychological – the impact of fiscal stimulus announced for infrastructure and defense. Like we subscribe to the need for sustainable public finances and structural reforms for the economy and budget, it is a debate that will benefit from fast decisions. The longer the debate about the potential for saving steps takes place, the higher the household risk and the company will withstand the expenditure and investment decisions – risk factors that seem to be passed by the financial markets so far.
Overall, the German economy has made itself too comfortable in stagnation, and it can take until next year before a more substantial recovery began to be revealed.
Source: Ing
