Improved economic outlook among German managers in July
Germany's Economy Shows Cautious Recovery Amidst Challenges
As we move towards the latter half of 2025, Germany's economy is showing signs of improvement following a prolonged period of economic challenges and trade tensions.
Inflation has eased to around 2.0% in June, a decrease that contributes to stabilizing consumer prices. Industrial production rebounded in May by 1.2% month-on-month, reflecting improved manufacturing and energy output, despite challenges in construction.
Economic forecasts have been revised upward. The ifo Institute expects GDP growth of +1.5% in 2026, nearly doubling its previous estimate, with a smaller growth of around +0.3% expected for 2025. Similarly, the Kiel Institute (IfW) forecasts +1.6% GDP growth for 2026.
These improved projections partly reflect the German government’s growth-oriented infrastructure and defense spending package, as well as assumptions that trade conflicts, especially those involving the EU and US tariffs, will have manageable impacts.
Supporting this outlook, business sentiment has improved steadily. The ifo Business Climate Index rose to 88.4 points in June—the highest level since May 2024—indicating improving company outlooks. The Conference Board's Leading Economic Index (LEI) for Germany also surged by 0.8% in May, the strongest monthly increase in five years.
However, risks remain. Ongoing trade tensions, particularly between the US and the EU, have created uncertainty for German exporters. The stronger euro acts like an additional tariff by making German exports more expensive internationally. Furthermore, climate factors such as the unusually hot and dry summer have put stress on river transport and industrial production.
Retailers sold less in May, and the order situation in industry still lacks momentum. The Ifo Business Climate Index for July was 88.6 points, slightly higher than June's figure but still below economists' expectations of 89.0 points. The current business situation was also assessed more positively.
The German economy's upswing remains anemic, according to Ifo President Clemens Fuest. The unresolved trade dispute with the US negatively affected exports, with the US being the largest buyer of "Made in Germany" goods.
Recent reports from the Federal Ministry of Finance indicate mixed economic signals. The specific impact of the weak retail and export figures on the overall German economy is not detailed in the report. The report does not provide a forecast for the future economic situation of the German economy.
In summary, while Germany’s economy in mid-2025 is showing signs of recovery in inflation, industrial production, and business sentiment, this positive trend is tempered by the lingering effects of international trade disputes and currency effects, alongside environmental challenges. Caution persists due to these external and structural factors.
The German government's budgetary policies, including infrastructure and defense spending, are contributing positively to the economy's recovery, as outlined in the financial reports from the Federal Ministry of Finance.
Despite the strengthening business sentiment and improved industrial production, employment policies remain a key focus for German policymakers, particularly in addressing the challenges faced by retailers and exporters amidst ongoing trade tensions and a strong euro.
