German economy grows as expected in the first quarter

Germany's economy grew by 0.2% in the first quarter of 2025, in line with market expectations and marking a modest rebound from the 0.2% contraction recorded in the previous quarter, according to preliminary data from Destatis.

German economy grows as expected in the first quarter

The quarterly growth provided some relief for policymakers and investors after a prolonged period of economic stagnation, as it signaled a tentative return to expansion for the eurozone’s largest economy. The improvement was largely driven by a combination of easing inflation, which provided breathing room for household consumption, and lower borrowing costs following recent monetary policy adjustments by the European Central Bank. These conditions supported a modest pickup in private investment and consumer spending. Adding to the positive tone was a notable improvement in both business and consumer sentiment, buoyed by the successful resolution of Germany's prolonged coalition negotiations. The formation of a stable federal government helped reduce political uncertainty, allowing for clearer fiscal planning and the launch of delayed investment initiatives in digital infrastructure, energy transition projects, and defense. These political developments also boosted expectations for public spending in the coming quarters, particularly as Germany moves to modernize its industrial base in response to energy price shifts and geopolitical risks.

Economy remains under significant structural strain

However, despite the quarterly rebound, the economy remains under significant structural strain. On a year-on-year basis, German GDP contracted by 0.2%, extending its recessionary streak to a seventh consecutive quarter—the longest such period since reunification. Persistent weakness in industrial production, sluggish export performance, and waning global demand have weighed heavily on growth. The manufacturing sector, a traditional engine of the German economy, continues to face headwinds from supply chain disruptions, rising labor costs, and, increasingly, trade uncertainty related to the U.S.'s tariff policies under the Trump administration. These external pressures are particularly acute for Germany’s automotive and machinery exports, which remain vulnerable to trade fragmentation and shifting global supply networks. Meanwhile, recent surveys indicate that although expectations have improved, actual output in key sectors remains subdued, suggesting that the recovery could prove fragile without sustained policy support.

Potential outlook

Looking ahead, the government is likely to lean on a combination of targeted fiscal stimulus and green industrial investment to foster medium-term growth, though structural reforms may also be necessary to boost productivity and reduce export dependency. For now, the Q1 result offers a glimmer of hope, but the path to a sustained and broad-based recovery remains uncertain.