Good mood alone doesn't create an economic miracle

The outlook is positive, at least among companies – but this could be wishful thinking. The problems of the German economy are too deep-rooted for money alone to achieve an economic miracle 3.0.

One-off effects instead of sustained recovery

The raw numbers couldn’t have looked much better through the end of July. In the first quarter, the German economy grew by 0.3 percent compared to the previous quarter. Leading indicators have also been pointing upward since the beginning of the year. But sometimes economic weakness lies in the details.

It became clear in Trump’s first days in office that we would face significant trade policy challenges in the course of the year. US importers reacted promptly and brought forward their orders. This also happened in Germany, with the result that German exports increased significantly compared to the previous quarter. However, with the tariffs implemented in the second quarter, these so-called “frontloading effects” then reversed. Exports fell in the second quarter compared to the first quarter, and since domestic demand did not recover sufficiently to offset this effect, the German economy contracted by 0.1 percent in the second quarter of 2025 compared to the previous quarter.

Reality check for optimists

Looking ahead, there are certainly reasons for more optimism – but at the same time, the list of risks remains long. For one thing, US tariffs continue to be a burden on the German export industry. Although the US and the EU have agreed on a deal, the basic tariff of 15 percent is significantly higher than it was at the beginning of the year. And there's more: the euro strengthened significantly in recent months, not only against the dollar but also against other currencies. This is an additional burden for export-oriented companies, as they now automatically sell their products abroad at a higher price. The export miracle of the first quarter is therefore unlikely to be repeated any time soon – quite the contrary.  

Domestic demand also remains a risk. Although sentiment among companies is improving noticeably, but optimism alone does not translate into economic growth. For that to happen, optimism would have to translate into investment. On a positive note, investment potential rose significantly in the first half of the year thanks to the German government's 500 billion euro infrastructure fund, the “whatever it takes” approach to defense and the investment promise of the “Made for Germany” initiative. If the funds are used effectively, we should at least see an economic upturn – but more is needed to regain competitiveness in the long term and return to structural growth. More planning certainty, more investment activity and more focus on the structural challenges of the future.
And more initiatives that benefit households. Because right now, consumer confidence is still in the basement. At the same time, uncertainty, which is being heightened by the cooling labor market, remains high, as does the propensity to save.  

How far will the ECB go?

Given weaker domestic demand and a softening labor market, price pressure is also likely to ease further, and German inflation, which has been at 2 percent for two months in a row, is likely to have a little more room to fall in the coming months. We expect the ECB to cut the deposit rate again by 25 basis points to 1.75 percent in September. And that should be it for ECB interest rate cuts for now.

In fact, the next direction the ECB takes for key interest rates is likely to be upward. But that’s neither an issue for this year or next. For the moment, the list of economic risks still outstrips the list of substantial growth opportunities. Accordingly, it can still be assumed that Germany will not emerge from economic stagnation by much in 2025 as a whole. Optimism is likely to translate into real activity only towards the end of the year and into solid growth in 2026. Nevertheless, the following still applies: good spirits and money alone do not make an economic miracle. Only the courage to embrace structural change, innovative strength, and targeted investment can do that.