The impact of tariffs is becoming evident, Germany's Q2 economic contraction exceeds expectations

According to Zhitong Finance APP, the contraction of the German economy in the second quarter exceeded previous expectations, as the performance of German manufacturers significantly declined after the inventory buildup by U.S. companies dissipated. The German Federal Statistical Office announced on Friday that the GDP in the second quarter decreased by 0.3% quarter-on-quarter, revised from an initial estimate of a 0.1% decline. Investment also became a major drag, falling by 1.4%, while private consumption's support for the economy was far below initial expectations.

The German Federal Statistical Office stated in a release: "The performance of industrial production was particularly disappointing compared to initial expectations."

The contraction of the German economy in the second quarter exceeded expectations.

This economic contraction is a significant setback for the largest economy in Europe and breaks the hopes that the country could emerge from the economic trough following the Russia-Ukraine conflict. In the first quarter of 2025, Germany's GDP grew by 0.3%, partly due to U.S. companies stockpiling ahead of the tariff implementation.

Carsten Brzeski, global macro chief at ING, stated: "The German economy has experienced a reversal of the inventory buildup effect and is also feeling the first comprehensive impact of U.S. tariffs. The German economy is stagnating and may not see a more significant recovery until next year."

In July of this year, the EU and the U.S. reached an agreement to impose a 15% tariff on most EU goods, which faced severe criticism from the German industrial sector.

The German economy is also affected by weak global economic growth, geopolitical uncertainties, and long-standing issues such as an aging workforce and excessive bureaucracy.

The German central bank warned in its monthly report on Thursday that GDP in the third quarter may again fail to achieve growth, with stagnation being the most likely outcome.

Meanwhile, the new German government's plans for significant increases in defense and infrastructure spending have brought some optimism, with effects expected to materialize by 2026.

Earlier this week, the S&P Global released the German Composite Purchasing Managers' Index, which showed that private sector activity unexpectedly accelerated in August, with manufacturing nearing the end of a three-year slump