The Economic Situation in the Federal Republic of Germany in August 2025

Slight fall in GDP in Q2

Germany’s economic performance slowed down in Q2 2025 – as the indicators had suggested in advance: according to a flash estimate from the Federal Statistical Office, GDP decreased by 0.1% quarter-on-quarter, (adjusted for price, seasonal, and calendar effects). Parallel to the flash estimate, routine revisions of GDP results were carried out, going back up to the year 2008. Some of the results for these years are significant: the economic recovery in 2021/2022 after the COVID-19 pandemic has now been shown to have been stronger than measured at the time. By contrast, real economic output in the past two years was considerably smaller than had been previously assumed.

The slight decline in GDP adjusted for price for Q2 is mainly the result of transactions being brought forward to Q1 due to the announcement of US tariffs. This had caused a strong export performance during that quarter. By consequence, exports in Q2 (and particularly exports to the USA) suffered duly – also providing part of the explanation why industrial production was weak. Net foreign demand (exports minus imports) is therefore expected to have been negative. In contrast to this, the figures from the Federal Statistical Office show that consumption has been up for the second consecutive time this quarter. At the same time, however, the leading indicators and the weak performance of the job market indicate that consumer sentiment continues to be subdued. According to preliminary analyses, investments in equipment and construction declined in Q2, following a recovery at the beginning of the year.

In spite of the weak overall economic development, the economic situation of small and medium-sized enterprises (SMEs) in Germany improved slightly in Q2, according to the SME barometer of the Institute for SME Research. Similarly, sentiment among SMEs has recently been estimated by the KfW SME barometer to have markedly improved. Nevertheless, the majority of companies post a decline in investments and profits.

Until very recently, the impact of a volatile US customs policy has palpably dampened economic development; now that an agreement in principle has been reached between the EU and the USA, however, this insecurity is expected to gradually fade away, even though some details have yet to be resolved. Therefore, the brightening of the sentiment indicators continues to be superseded by the dampening impact of the declining trade and geopolitical environment, which, for now, present an obstacle to lasting economic recovery.

Subdued economic performance after transactions have been brought forward and in the context of global uncertainty dampen down expections for global trade

In May, the moderate upward trend observed in global industrial output in recent months continued according to the CPB World Trade Monitor, expanding by 0.3% in seasonally adjusted terms over the figure for April. This represents a 3.1% increase year-on-year. Whilst output in the USA and China stagnated at the levels of the preceding month, the eurozone (+1.6%) and eastern Europe (+2.5 %) were able to increase their performance. In the light of persisting geopolitical insecurity, the leading indicators are sending mixed signals: the S&P Global Purchasing Managers’ Index (PMI) for the global economy rose by 0.7 points in July to 52.4, indicating a slight expansion. Sentiment in the services sector continued to brighten (+1.6 points to 53.4 points), whereas the manufacturing PMI fell from 50.4 to 49.7 points, i.e. to just below the growth threshold of 50 points again, as had been the case in April and May. The sentix index for the global economy, which is based on the performance of the financial market, went down for the first time in August after three consecutive climbs, but remained on the positive side. The investors surveyed for the index rated the economic expectations, in particular, but also the current situation as being less favourable than in the preceding month, with the indicators for the eurozone, Germany and Switzerland, in particular, falling quite considerably.

According to the CPB World Trade Monitor, the global trade in goods fell again in May after a decline by 1.0% in April – this time by 0.9% compared to the preceding month – having been propped up in Q1 by the transactions brought forward in trade with the USA. Global developments are being slowed down particularly as a result of declining US exports (-5.1%) and by a fall in imports by Asian emerging economies (excluding China) (-2.8%) and in eastern Europe (-1.9%). The goods trade of the eurozone also inched down (exports: -0.7%, imports: -0.8%). Overall, in May, however, global trade clearly remained at a higher level compared to the preceding month (+3.5%).

While global industrial output is continuing to develop at a stable pace, the declining figures for trade suggest that the effects of transactions being brought forward are tailing off, leaving world trade vulnerable to the increasing burden caused by a more adverse trade-policy environment . The RWI/ISL Container Throughput Index stagnated again in June, standing at 136.5 points compared to 136.4 points in the preceding month. The flatlining that has been persisting since the beginning of the year illustrates the burden US customs policy has put on global trade. While container throughput in the Chinese ports has largely remained unaffected, the ports in northern Europe recorded considerable decreases in throughput, which have eaten up earlier gains. The fall of the Nordrange Index is suggestive of increasing insecurity in European foreign trade.

As transactions were brought forward in the face of the announced US tariff hikes, the economic situation in numerous countries exceeded initial expectations in Q1 2025. Overall, the IMF in its latest World Economic Outlook forecasts an increase in output by 3.0% for 2025 and by 3.1% for 2026. Both figures have been revised upward compared to the April forecast, due not least to transactions brought forward and lower effective tariffs as had been announced in April. An increase of 2.6% in the global trade volume is forecast for 2025, the expected figure for 2026 is 1.9%. However, given the entrenched geopolitical tensions and the threat of new barriers to trade, the global economic outlook is subject to considerable downward risks, which are likely to put a burden on global industrial output and the investment climate, in particular.

German exports stabilise in June

Following previous declines, Germany’s export business stabilised in June: nominal exports of goods and services rose by 1.5% month-on-month after seasonal and calendar adjustment (May: -2.3%). In the less volatile three-month comparison, however, exports in Q2 were 0.5% below the average level of Q1, which had been influenced by the effects of orders and trade flows being pulled forward in response to the announced increase in US tariffs. By destination, exports to EU Member States rose markedly in June (+2.4%), whereas exports to non-EU countries continued to decline (-1.2%), including shipments to the United States (-2.1%).  At the same time, nominal imports of goods and services registered a strong increase of 2.5% compared with the preceding month, after seasonal and calendar adjustment (May: -3.4%). On a quarterly basis, imports were 1.4% higher than in the preceding period. In June, Germany imported more goods from both the EU (+3.5%) and non-EU countries (+5.0%), with particularly strong increases from the United States (+19.8%) and China (+5.8%) compared with May. As imports grew more strongly than exports, the seasonally adjusted monthly trade surplus in goods and services narrowed from €10.2 billion to €8.9 billion.

Import prices rose by 0.2% in June compared with the preceding month after seasonal adjustment, reflecting higher energy and commodity prices, while export prices remained unchanged (0.0%). As a result, the terms of trade deteriorated by 0.2% over the preceding month. In real terms, this implies that the increase in goods imports is likely to be somewhat less pronounced, while goods exports showed no change.

Leading indicators are sending mixed signals for the coming months in view of the uncertainty surrounding US tariff policy. In June, foreign orders declined for the first time since January, falling by 3.0% month-on-month after seasonal adjustment. While demand from the eurozone rose sharply (+5.2%), a significant decrease of 7.8% in orders from outside the eurozone drove the overall decline. Orders from abroad for capital goods, in particular, fell markedly (-9.4%). In the less volatile quarterly comparison, however, foreign orders increased by 5.7% in Q2. The ifo export expectations index improved significantly in July, rising from -3.6 points in May to -0.1 points, reflecting growing optimism about a resolution of the tariff dispute. The survey was conducted prior to the announcement of the EU–US tariff agreement. Manufacturers of electrical equipment as well as producers of food and beverages anticipate higher exports. Confidence is also increasing in the automotive industry, although survey results there remain negative. By contrast, metal production and processing continue to expect declining exports.

After a start to the year shaped by the  effects of demand being brought forward, German goods exports declined somewhat in Q2, as had been expected. The recent agreement in principle between the EU and the United States has improved the predictability of external trade; however, as specific details have yet to be finalised, uncertainty remains elevated for the time being. With the expiry of the tariff pause and the increase in effective US tariffs, export momentum is expected to remain subdued in the near term.

Production declines in Q2, but orders remain positive

Industrial output contracted significantly in June. According to data from the Federal Statistical Office, production fell by 1.9% over the preceding month after adjustment for prices, calendar and seasonal effects, following a stagnation in May (-0.1%, revised down). The decline was driven mainly by a sharp drop in industrial production (-2.8%), while output in the construction sector recovered slightly after a previous fall (+0.7%) and energy production once again recorded a strong increase (+3.1%).

Across the various industrial branches, developments were largely negative. Production volumes decreased notably in the important sectors of mechanical engineering (-5.3%) and motor vehicles and parts (-0.9%). Output also fell among manufacturers of metal products (-1.6%) and electrical equipment (-0.4%). The pharmaceutical industry experienced a particularly pronounced decline (-11.0%). By contrast, growth was recorded by producers of data-processing and optical equipment (+2.0%) as well as chemical products (+1.0%).

In Q2 overall, production volumes were down by 1.0% compared with Q1. This was attributable to declines in both industrial output (-1.3%) and construction activity (-2.3%). By contrast, energy production rose markedly (+4.1%), partly due to the expansion of electricity generation from photovoltaic installations.

Incoming orders in manufacturing also fell again in June. According to the Federal Statistical Office, order volumes declined by 1.0% compared with the preceding month after price, calendar and seasonal adjustment. Domestic orders increased by 2.2%, partially offsetting their earlier decline. At the same time, foreign demand, which had risen significantly since the start of the year, contracted by 3.0% in June, driven in particular by a pronounced decline in investment goods orders. While demand from the eurozone rose sharply (+5.2%), orders from non-euro area countries fell by 7.8% – the first decline this year. Excluding large-scale orders, however, incoming orders overall increased by 0.5%.

Developments within the individual branches of manufacturing varied considerably. Producers of electrical equipment benefited from particularly strong incoming orders (+23.5%). Demand also increased again for data-processing, electrical and optical equipment (+7.1%) as well as chemical products (+1.5%), following sharp declines in the preceding month. By contrast, orders for metal products (-12.9%), motor vehicles and parts (-7.6%) and machinery (-3.4%) fell significantly.

Although orders had already declined by 0.8% in the preceding month, they nonetheless recorded overall growth of 3.1% in Q2. This was driven in particular by demand for capital goods (+7.3%), increasingly sourced from both the domestic market (+2.5%) and other eurozone countries (+10.8%). By contrast, sales of intermediate goods (-2.6%) and consumer goods (-0.3%) provided no positive impetus in Q2.

The weakening of industrial production in Q2 is also likely to reflect a correction of the effects of demand being brought  forward that were observed earlier in the year in anticipation of higher US tariffs, which had temporarily supported activity in Germany’s export-intensive manufacturing sector. The recent fall in demand for industrial goods indicates that the higher tariffs on exports to the United States, which now appear to be a lasting feature, are likely to weigh on industrial activity in the coming months.

Retail sales rise; sentiment indicators remain weak

Price-adjusted retail sales (excluding motor vehicles, seasonally adjusted) increased by 0.9% in June compared with the preceding month. Food sales increased by 0.3%, while non-food turnover expanded by 1.4%, with internet and mail-order trade registering a particularly strong rise (+9.0%). Year-on-year, real retail turnover grew by 4.6%, driven mainly by a substantial increase of 20.4% in online and mail-order sales. In Q2, retail turnover advanced by 0.3%, marking the fifth consecutive quarterly rise, supported by upward revisions to the preceding two months.

Passenger car registrations recovered in July, rising by 6.7% over the preceding month after two declines. In three-month terms, registrations increased by 2.1%. Compared with the same month of the preceding year, registrations were 11.1% higher. Private registrations expanded by 11.8% month-on-month and by 4.9% on a three-month basis, while registrations by firms and the self-employed rose by 4.1%.  By contrast, turnover in the hospitality sector fell in May, declining by 2.2% in nominal terms and 4.6% in real terms over the preceding month. Compared with a year earlier, the sector recorded nominal growth of 0.8% but a real decline of 4.0%.

After the modest strengthening of private consumption in Q1 of 2025, forward-looking indicators continue to signal subdued momentum.  According to GfK forecasts, consumer sentiment is expected to weaken further in August, falling by 1.2 points to -21.5. In July, sentiment declined slightly (-0.3 points) to -20.3, remaining clearly negative. The deterioration in August reflects an increased propensity to save and reduced willingness to purchase, despite more favourable income expectations. The HDE consumer barometer stagnated in August after reaching its highest level in a year in July. The ifo business climate index for retail (including motor vehicles) fell back for the second time in July, declining by 2.5 points to 22.8, following a sharp increase in May. Both assessments of the current situation and expectations worsened and remain negative. 

Overall, the indicators continue to point to weak consumer confidence. Concerns regarding the economic outlook and strains in parts of the labour market are likely to weigh on private consumption over the remainder of the year.

Inflation rate stable at 2.0%

The inflation rate – the year-on-year increase in the price level – stood at 2.0% in July, unchanged from the preceding month. Compared with June, consumer prices rose slightly, up 0.2% after seasonal adjustment. Energy prices again provided noticeable relief, falling by 3.4% compared with July 2024 (+0.4% over the preceding month). Food price inflation stabilised at 2.2% year-on-year, with a small monthly increase of 0.1%.  Core inflation, which excludes energy and food, also remained unchanged in July at 2.7%. Services continued to contribute to price pressures, though with easing momentum; month-on-month, core inflation rose by 0.3%.

Looking ahead, inflation is expected to stabilise around its current level during the course of the year, reflecting more moderate wage settlements and a still subdued pace of overall economic activity.

Labour market weakness persists at the start of the second half of the year

The sideways movement in the labour market continued into the summer months. In July, unemployment remained almost stable, up 2,000 persons after seasonal adjustment, while underemployment fell again by 10,000. By contrast, employment declined by 19,000 in June, following significant downward revisions to earlier data as part of the Federal Statistical Office’s annual summer adjustment. Employment subject to social security contributions also fell in May, down 16,000. Use of short-time work declined slightly in May, down to 218,000 persons, but remained at an elevated level. The number of notifications for short-time work is expected to have increased slightly in July compared with the preceding month.

Although some leading indicators have improved recently, the outlook remains subdued. The Federal Employment Agency’s job vacancy index fell again in July. At the same time, the ifo employment barometer points to continued job cuts in manufacturing and retail. Only in construction and parts of the services sector have employment prospects improved somewhat in recent weeks Given the recent weakness in economic activity and with a recovery not expected until the turn of the year, labour market stagnation is likely to persist into the second half of 2025.

Corporate insolvencies remain elevated

According to official statistics, the number of corporate insolvencies fell by 4.2% in May compared with April, dropping to 2,036 proceedings filed. Compared with May 2024, however, insolvencies were up by 5.3%. In the first five months of 2025, insolvencies were 11.1% higher than in the same period of the preceding year. The continued high number of insolvencies reflects several factors, including weak overall economic conditions, structural challenges, higher costs and ongoing geopolitical uncertainty.

The Halle Institute for Economic Research (IWH) insolvency trend for partnerships and corporations, which is methodologically narrower but more up to date than the official statistics, shows a month-on-month increase of 11.8% in July and a year-on-year rise of 13.1% for or partnerships and corporations. July saw 1,588 insolvencies, the second-highest monthly figure in 20 years, surpassed only in April 2025 with 1,626 cases. The number of employees affected, however, was 39.4% lower than in June and close to the July average for 2016–2019. According to the IWH, the elevated number of insolvencies in July was partly attributable to seasonal patterns and the unusually high concentration of court hearings during the month. Based on leading indicators, the IWH expects insolvencies to remain high in the autumn.

---------------------------

[1] This report is based on data that was available as of 12 August 2025. Unless stated otherwise, these are rates of change against the respective preceding period on the basis of price-adjusted figures which have also been adjusted for calendar-day and seasonal variations.