Unforeseen contraction in Germany's economy signalizes persisting economic downturn
================================================================================
The German economy, Europe's largest, faced a contraction in 2023 and 2024, according to recent data. The contraction was primarily due to long-lasting recessionary pressures caused by supply chain disruptions, high energy costs, bureaucratic obstacles, and external trade difficulties.
In the second quarter of 2025, the German economy showed signs of contraction, following surprisingly strong growth in the first quarter due to front-loading effects. Gross domestic product (GDP) decreased by 0.1% compared to the previous quarter, which was lower than the anticipated zero growth between April and June.
The manufacturing sector and key exports were hit hard, contributing to the economy's contraction. Global market conditions and dependency on imports, especially from China, worsened supply chain disruptions. High energy prices, impacting manufacturing and industrial sectors, also played a significant role.
Trade tensions with the US, including tariff threats, dampened demand from one of Germany’s largest trading partners, leading to reduced exports, especially in 2024 when the U.S. imposed tariffs on EU goods. This, coupled with reduced investment and corporate layoffs across major German companies, reflected broader economic distress in the corporate sector.
The economy shrank by approximately 0.9% in 2023 and 0.5% in 2024, which was worse than initially reported figures. The economy shrank by 0.1% in the second quarter of 2025 after a marginal growth in the first quarter.
Despite these challenges, forecasts from economic institutes predict a recovery starting in 2026. Government stimulus measures focused on infrastructure and defense, as well as easing trade conflicts, are expected to aid the recovery. The ifo Institute and the Kiel Institute for the World Economy raised growth projections for 2026 to around 1.5%–1.6%, signaling optimism for overcoming the current crisis.
In Italy, the economy contracted by 0.1% in the second quarter, while France's economic growth increased by 0.3% in the same period. Official data for the whole eurozone's economic growth is due to be released later this week.
Jens-Oliver Niklasch, an analyst from LBBW bank, stated that the German economy is treading water and will need efforts to get back on a stable growth path. He also expressed concern about the unsatisfactory situation with high US tariffs. Recent indicators, including business and investor confidence surveys, had suggested that the downturn in the German economy may have bottomed out.
Some economic institutes expect the German economy to return to slight growth this year, offering a glimmer of hope for a recovery in the near future.
In the face of the economic contraction, the German finance sector might experience difficulty in maintaining growth due to reduced investment and corporate layoffs across major companies. The turnaround in the German industry, particularly the manufacturing sector and key exports, heavily depends on the easing of global market conditions, supply chain disruptions, and high energy prices.
