Germany’s Q2 Economy Contracts 0.3% Amid Tariff Impact and Weaker Demand

Germany’s economy shrank by 0.3% in the second quarter compared with the previous three-month period, according to updated official data released on Friday, marking a more severe contraction than the initial 0.1% decline previously reported [1]. The revised figures highlight a broad-based slowdown across key sectors, including manufacturing, construction, and household consumption, all of which were revised downward from initial estimates [2]. The decline follows modest growth of 0.3% in the first quarter, indicating that the world’s fourth-largest economy has now contracted for two consecutive quarters [3].

The downward revision was largely driven by a sharp drop in manufacturing and construction output in June, as well as weaker-than-expected household spending for the quarter [1]. These developments reflect a more fragile economic outlook than previously anticipated, with the updated GDP contraction deepening concerns over Germany’s prolonged economic stagnation. The economy has now recorded negative growth for the past two years, underscoring the challenges faced by Chancellor Friedrich Merz’s newly formed administration in spurring a sustainable recovery [2].

The revised contraction was attributed in part to a reversal in the export-driven momentum seen in the first quarter, as U.S. demand—once a key driver of German exports—slowed significantly in the second quarter amid the implementation of new tariffs [6]. ING economist Carsten Brzeski noted that the front-loading of U.S. demand had previously masked the full impact of trade tensions, and that the second quarter saw the first full effect of the imposed tariffs [6]. This shift, combined with elevated import levels, has contributed to a widening trade imbalance and a broader weakening of industrial production [4].

Despite the overall contraction, domestic consumption remained relatively more resilient, though it showed signs of strain as Germans took annual vacations and reduced discretionary spending in sectors such as dining out [5]. These trends highlight the vulnerability of a consumer-driven economy in the face of global trade uncertainties and shifting demand patterns.

The government has already announced a 500 billion-euro ($582 billion) investment plan to revitalize infrastructure over the next 12 years and pledged to streamline red tape and accelerate digitization [1]. In addition, a group of major German companies last month committed to investing at least 631 billion euros ($731.7 billion) in the country over the next three years [1]. However, analysts caution that the full economic recovery may take longer than expected. Brzeski suggested that a more substantial recovery could not be seen until 2026 [6].

With the Eurozone’s largest economy now experiencing a sharper-than-expected contraction, the outlook for the broader European economy has become clouded. Policymakers will need to closely monitor employment trends and investment flows as they craft a response to the current economic downturn. The updated Q2 figures not only redefine expectations for Germany but also raise urgent questions about the need for more aggressive policy intervention to stabilize domestic demand and support key sectors in the months ahead.

Sources:

[1] German economy shrank 0.3% in second quarter as US tariffs slowed exports

(https://www.reuters.com/world/europe/german-economy-shrank-03-second-quarter-more-than-initially-reported-2025-08-22/)

[2] German economy shrank by 0.3% in second quarter in ...

(https://apnews.com/article/germany-economy-gdp-shrank-second-quarter-ed5a0ca6732d3cf92828e045144defc2)

[3] Germany falls back into 'recessionary territory' as second- ...

(https://www.ft.com/content/a4d2660f-311f-4281-895c-c95274234a7f)

[4] Germany updates: Economy shrinks more than expected

(https://www.dw.com/en/germany-updates-economy-shrinks-more-than-expected/live-73728000)

[5] The German economy shrank more than expected in ...

(https://www.reddit.com/r/Finanzen/comments/1mwyw44/deutsche_wirtschaft_ist_im_zweiten_quartal/?tl=en)

[6] German Economy Shrank by 0.3% in Second Quarter ...

(https://www.usnews.com/news/business/articles/2025-08-22/german-economy-shrank-by-0-3-in-second-quarter-in-worse-showing-than-initially-thought)