German economy grows 0.3% as export rebound strengthens recovery hopes

The German economy grew faster than initially estimated during the second quarter of 2026, supported by a rebound in exports and improved activity across manufacturing, wholesale and retail trade.

Gross domestic product increased by 0.3% between April and June compared with the previous quarter, according to revised figures from the Federal Statistical Office, Destatis. The preliminary estimate published in July had indicated growth of 0.2%. On an annual basis, GDP rose by 1%, also exceeding the original 0.9% estimate.

The result followed quarterly growth of 0.4% during the first three months of 2026 and marked Germany’s third consecutive quarter of expansion. That sequence provides stronger evidence that Europe’s largest economy is emerging from the prolonged stagnation that affected industrial production, investment and business confidence during previous years.

“The German economy is maintaining the growth momentum seen at the start of the year,” said Ruth Brand, president of Destatis.

The main driver was foreign trade. German exports of goods and services increased by 2% from the previous quarter, while imports rose by 1.5%. The figures suggest that external demand is once again supporting the country’s industrial model, even as companies face higher energy costs, greater Chinese competition, US trade barriers and continuing geopolitical uncertainty.

Some of the increase may also reflect international customers bringing orders forward to avoid possible price increases or supply-chain disruption associated with the war involving Iran and instability around the Strait of Hormuz.

Manufacturing output grew by 0.9%, led by chemicals and electrical equipment. Most service activities also expanded, while construction remained broadly unchanged. Financial and insurance services were the main exception, recording a quarterly decline of 0.7%.

The composition of growth, however, reveals important weaknesses.

Household and government consumption each increased by only 0.1%, indicating that domestic demand remains subdued. Capital investment also declined slightly, with spending on machinery and equipment falling by 1.4%.

The investment figures are particularly relevant for Germany’s medium-term outlook. The country needs companies to modernise factories, improve energy efficiency, digitalise production and respond to intensifying international competition. An export-led rebound without a sustained recovery in productive investment may struggle to generate stronger long-term growth.

The labour market presents another warning sign. Approximately 45.7 million people were employed in Germany during the second quarter, 212,000 fewer than a year earlier, representing a decline of 0.5%.

Employment in service industries fell for the first time since the Covid-19 crisis, while manufacturing and construction continued to report significant job losses. With average working hours per employee unchanged, the economy’s total volume of work also decreased by 0.5%.

Business sentiment nevertheless improved strongly in August.

The Ifo Business Climate Index climbed to 88.8 points, from 86.7 in July. Companies reported greater satisfaction with their current operations and revised their expectations substantially upward, while uncertainty continued to decline.

The assessment of current conditions rose to 88.5 points, while the expectations component increased to 89.1. Confidence improved across manufacturing, services, trade and construction.

Manufacturers expect production to rise over the next three months, although companies remain dissatisfied with their order books. The outlook also improved among IT services and retailers, while transport and logistics businesses continue to face difficult operating conditions.

Together, the revised GDP figures and the Ifo survey suggest that Germany’s recovery is becoming more visible, but they do not yet point to a broad-based economic boom.

The economy remains highly dependent on exports, while domestic consumption, business investment and employment have yet to generate comparable momentum. Energy-intensive companies also remain exposed to higher oil and gas prices resulting from geopolitical tensions.

Additional disruption could come from exceptionally low water levels on the Rhine, which have restricted cargo capacity, increased transportation costs and complicated the movement of industrial materials. The Bundesbank expects the recovery to continue, supported by exports and government expenditure, but has warned that industrial capacity utilisation remains low.

Chancellor Friedrich Merz is counting on higher spending on infrastructure and defence to strengthen domestic demand and accelerate industrial modernisation. Much of that stimulus, however, is expected to affect economic activity more significantly over the coming quarters rather than immediately.

The fiscal backdrop is also becoming more demanding. Germany recorded a public-sector deficit of €71.3 billion during the first half of 2026, an increase of €36.6 billion from the same period a year earlier. The deficit was equivalent to 3.1% of GDP, slightly above the Maastricht reference threshold, as expenditure grew faster than tax and social-contribution revenue.

The German government currently expects GDP to increase by only 0.5% for the whole of 2026, down from an earlier forecast of 1%, reflecting the impact of higher energy prices and geopolitical disruption.

For European businesses and investors, the second-quarter revision offers cautious encouragement. German exporters and industrial suppliers appear more resilient than feared, and corporate sentiment is recovering.

But the decisive test will be whether the export rebound can translate into stronger investment, domestic demand and employment. Germany may have moved beyond stagnation, but it has not yet secured a durable economic recovery.