Germany’s Q2 Slump Deepens, Exposing a Fragile Industrial Core

Germany’s second-quarter performance was weaker than first reported, with the final figures showing a 0.3% quarter-on-quarter decline in output. The sharper contraction erases the modest improvement recorded at the start of the year and revives concerns that the region’s largest economy has yet to find a durable footing after a prolonged period of underperformance.
What changed between the initial estimate and the final read was largely the magnitude of the industrial downturn. Factories faced skinnier order books and slower throughput than assumed in July, and the expected pickup from easing supply bottlenecks failed to materialize. Export momentum, which had briefly firmed in the first quarter as manufacturers shipped goods ahead of new U.S. tariffs, faded in the spring. Investment also disappointed: businesses pared back spending on machinery and equipment, a signal that corporate Germany is waiting for clearer demand signals before committing to expansion. Construction slipped as well, with developers grappling with higher financing costs and a cooler pipeline of projects.

Not everything was negative. Household spending inched higher as real incomes improved, and public consumption provided a small cushion. But those bright spots were overshadowed by weakness in the tradable sectors that typically set the tone for the broader economy. The net result is an economy that remains overly reliant on services resilience while its industrial base continues to adjust to a new world of higher energy costs, tighter global financial conditions, and more fragmented trade.

The policy conversation is evolving in response. With inflation pressures easing, the central bank has begun to lower interest rates, a shift that—over time—should support credit-sensitive activity. In Berlin, proposals for a sweeping public investment drive are gaining attention, pitched as a way to upgrade transport networks, accelerate digitalization, and support the green transition. The growth dividend from such plans, however, would be backloaded, leaving 2025 still heavily dependent on the cycle in global demand and the trajectory of corporate capex.

Markets are reading the tea leaves cautiously. Government bonds found some support as investors priced a softer macro path, while equity strategists debated whether the worst of the industrial downswing is behind us or whether another leg lower is in store if external demand weakens further. Currency moves were muted, reflecting a euro area that is showing a patchwork recovery—firmer in some smaller economies, tentative in the core.

The burden of proof now shifts to incoming data. If business surveys continue to stabilize, energy prices remain in check, and export orders improve as trade partners reaccelerate, Germany could edge back toward modest growth by late in the year. If those conditions fail to line up, the second-quarter revision may be a sign that the industrial reset still has distance to go—and that a more forceful policy response will be needed to rebuild momentum.