An Economic Miracle for the Growth-Hungry

The timing is unlikely to be a coincidence. Germany's surprisingly strong economic performance in the second quarter has undoubtedly contributed to this renewed interest. Between April and June, the German economy expanded by 0.3%, revealing a level of resilience that was both unexpected and, frankly, somewhat unusual.

As encouraging as that may be, the positive surprise does not yet amount to a new economic miracle. Rather, a number of one-off factors provided a tailwind for industry, foreign trade, and, to some extent, private consumption. On the export side, German companies benefited from the fact that several Asian economies were hit harder than Germany by the closure of the Strait of Hormuz. This effectively created a temporary boom for parts of German industry. In addition, the €500 billion infrastructure investment package now appears to be making its way into the real economy. Over the coming months, the federal government's “whatever it takes” approach is also likely to continue supporting economic activity. As for consumer spending, the negative effects of high energy prices were at least partially cushioned by the fuel tax rebate that was introduced in May and June.

With the conflict in the Middle East having escalated again after a brief respite and increasingly taking on the characteristics of a long-term challenge, financial pressure on German households is likely to persist for the time being. Nor is everything rosy in industry. Excessive sunshine and insufficient rainfall are disrupting production and supply chains. And with the heating season inevitably following the summer heat, below-average gas storage levels could translate into additional cost pressures for both households and businesses. Even so, sentiment among manufacturers, service providers, and consumers has continued to improve. Despite the risks, economic activity has remained resilient so far in the third quarter.

At the same time, the persistence of economic risks also implies the potential for more prolonged inflationary pressure. Despite the recent turmoil in bond markets driven by growing concerns over the sustainability of public debt, financial markets appear to expect further interest-rate increases from the European Central Bank. Yet neither inflation nor economic growth is currently being fueled by excessively strong domestic demand. As a result, second-round effects remain unlikely. A deposit rate of 2.5% therefore seems a plausible ceiling. At that level, rates would still lie within the range the ECB considers neutral; anything significantly higher would risk choking off economic growth.

Whether the ECB would truly be willing to counter a supply-side shock at the cost of a shrinking economy remains open to question. Especially if the much-discussed new economic miracle continues, for now, to be little more than wishful thinking for those who have spent years longing for stronger growth. The good news, however, is that even if economic conditions deteriorate again in the second half of the year, 2026 is still expected to deliver the strongest annual growth rate since 2022.