German economy shrinks more than anticipated in Q2

Germany’s economy contracted 0.3% quarter-on-quarter in Q2 2025, sharper than the preliminary estimate of a 0.1% drop and reversing the 0.3% expansion recorded in the previous quarter. It was the steepest quarterly decline since Q2 2024, underscoring the fragility of Europe’s largest economy amid rising global headwinds.

The downturn was primarily driven by a 1.4% fall in fixed capital formation, reflecting weaker investment in both construction and equipment. Machinery, vehicles, and other industrial equipment saw particularly sharp declines as firms held back spending in the face of trade uncertainty.

External demand also weighed on growth, with exports slipping 0.1% after a strong 2.5% rise in Q1, pressured by higher US tariffs and softer global trade flows. Imports, however, continued to rise by 1.6%, mirroring the pace of the prior quarter and creating a drag from net trade.

On the domestic side, private consumption slowed sharply to just 0.1% growth from 0.6%, suggesting households are becoming more cautious despite relatively steady employment levels. Government spending provided some offset, rebounding 0.8% after contracting in Q1, while inventory accumulation contributed positively to headline growth.

By industry, the contraction was broad-based, with output shrinking in manufacturing, construction, trade, transport, hospitality, and financial and insurance services, highlighting widespread weakness across both goods-producing and service-oriented sectors.

On a year-on-year basis, GDP grew 0.2%, slightly below the 0.3% pace in Q1, though still marking a second consecutive quarter of annual expansion. Looking ahead, the data reinforce concerns that Germany may struggle to regain momentum in the second half of the year, as persistent tariff pressures, weak investment appetite, and subdued consumer demand continue to weigh on growth prospects.