By David Born

Germany’s economic recovery remains fragile. After modest growth in the first quarter, economic momentum weakened again in the second. Structural headwinds – from geopolitical uncertainty and elevated energy costs to stalled reforms – remain unresolved. At the same time, Donald Trump’s return to the presidency and his renewed trade agenda are adding pressure on Germany’s export-driven industries. The labor market is also beginning to lose steam. Overall, the economic environment remains strained.

After two years of economic stagnation, the Roland Berger Institute projects GDP growth of only +0.2% for 2025. The modest increase in the first quarter (+0.3%) was largely driven by temporary front-loading effects in exports. In the second quarter, however, output declined slightly (– 0.3%), highlighting once again the fragile state of Germany’s economic recovery. Weak domestic demand and subdued investment activity – shaped by political uncertainty at home and abroad – continue to weigh heavily on economic momentum.

The weakness is most evident in Germany’s manufacturing sector. Industrial output fell sharply in June 2025, reaching its lowest level since May 2020. Compared to the same month last year, total production declined by 4.8%, with energy-intensive industries contracting by as much as 7.5%. Particularly steep declines were recorded in mechanical engineering (–5.3% vs. previous month), pharmaceuticals (–11.0%), and food production (–6.3%). The setback underscores the sustained pressure on industry – especially in energy-intensive segments.

Despite weak production figures, other indicators point to possible early signs of stabilization. Order backlogs rose by 0.4% in May compared to the previous month and stood 4.7% higher year-on-year, driven primarily by a strong increase in foreign demand (+7.4%). Against this backdrop, business sentiment has also improved: the ifo Business Climate Index climbed by 0.9 points in June, reaching 88.4.

Yet, the tougher US trade policy under Donald Trump is already leaving its mark on German exports. After a temporary rise in the first quarter - driven by inventory build-ups in the US - exports fell by 1.4% in May, with shipments to the US dropping by 11% year-on-year. While ifo export expectations showed a slight improvement in June, overall uncertainty remains elevated. The recently negotiated tariff compromise between Brussels and Washington may reduce trade risks in the short term, but it also weighs on the competitiveness of German products.

The strain is equally evident in the corporate sector: with roughly 11,900 insolvencies in the first half of 2025, business failures have reached their highest level in a decade. Industrial small- and medium-sized enterprises are particularly affected. At the same time, labor market dynamics are weakening. Job vacancies declined by 10% year-on-year, while the unemployment rate climbed to its highest level in five years. This leaves the economy without critical impulses required to reignite consumer spending.

Germany’s economy remains under pressure. Recent interest rate cuts and the announced investment program have so far produced little tangible impact, and the optimism that emerged in spring has recently faded again. Economic growth in Germany is expected to remain subdued at just 0.2% in 2025. Only next year are higher public investments likely to generate noticeable growth impulses - provided these programs are accompanied by reform progress that boosts investment confidence, and no further escalation occurs in trade policy.