Germany: Economy expands more than initially estimated in Q1
Germany momentarily ditches title of Europe’s sick man and reclaims 2020’s size: A second reading showed that the German economy started the year with unexpected gusto: Seasonally and calendar-adjusted GDP expanded 0.4% on a quarterly basis, contrasting the 0.2% decline recorded in Q4 2024 and growing twice as fast as initially estimated. The reading was among the strongest in the post-pandemic era and the G7, and was broadly in line with the Euro area average. As a result, the economy regained its 2020 size, the year the pandemic struck.
On an annual basis, economic activity dropped 0.2% in Q1, improving from the 0.4% decline initially estimated for the quarter and clocked in Q4 2024. Still, this marked the seventh contraction in the last ten quarters.
Net trade, households and businesses underpin expansion: Q1’s quarterly upturn was widespread across the economy. Net trade added 0.9 percentage points to GDP growth, contrasting the 1.1 percentage points detraction in the previous quarter. Exports of goods and services rose 3.2% in Q1 (Q4 2024: -3.1% qoq s.a.), marking one of the strongest results in the post-pandemic era due to front-loading ahead of U.S. tariff hikes—particularly of pharmaceuticals and automobiles. Meanwhile, imports of goods and services—which contribute negatively to GDP—grew 1.1% in Q1, rebounding from the prior quarter’s 0.7% fall.
Domestically, healthier confidence among consumers after the February federal elections and the subsequent landmark fiscal reform lifted growth in private spending—which accounts for around half of GDP—to 0.5% in Q1 (Q4 2024: +0.2% qoq s.a.); this marked the best result in nearly two years. Households’ propensity to consume was further bolstered by a cumulative 175 basis points of ECB rate cuts since June 2024, which also fanned fixed investment growth to 0.9% in Q1 (Q4 2024: +0.5% qoq s.a.). This result was among the strongest in the past few years and benefited from accelerating capital outlays on construction plus machinery and equipment. Less positively, changes in inventories—which are volatile and, therefore, not reflective of the underlying strength of the economy—detracted 0.9 percentage points from the GDP reading, swinging from a 0.5 percentage point contribution in the previous quarter. Moreover, public spending shrank 0.3% in Q1, which contrasted with the 0.4% rise recorded in Q4: The government collapsed in November 2024 before it could pass the 2025 budget.
Economy to remain in the doldrums in 2025: Our panelists expect the economy to screech to a near halt in Q2, with rising trade barriers shaking an already fragile recovery. In April, major trading partner the U.S. imposed a 10% baseline tariff and a 25% duty on imports of cars, a key German export. This will have capped exports as well as sentiment among consumers and businesses. Still, sequential GDP growth should ramp up in H2, benefiting from interest rate cuts and recently announced fiscal stimulus and healthy real wage growth.
Overall in 2025, our Consensus is for the economy to escape a third consecutive contraction only by a whisker, with momentum capped by a protracted malaise in the key industrial sector and a more adverse trade environment. A U.S.-EU trade war is a downside risk, while the implementation of fiscal stimulus will be key to watch given Germany’s lackluster public investment over recent years.
Panelist insight: Berenberg’s Holger Schmieding commented:
“The fiscal boost following the German debt brake reform will take time to materialise. Germany’s new government of chancellor Friedrich Merz will likely finalise the draft budget for 2025 only on 25 June for parliament to pass it in mid-September. Near-term, trade war risks can still delay the German recovery. However, we expect Trump to defuse the costly trade tensions by striking deals within the next two months. […] If so, the German economy can start to expand again later this year.”
Carsten Brzeski, analyst at ING, was more upbeat:
“The German economy remains in the middle of two seismic activities: a new government, which seems to lack strong ambition for structural reforms but will have access to unprecedented fiscal space for infrastructure and defence investments, and fundamental shifts in trade and geopolitics, including US tariffs. […] Even if the first quarter performance is clearly the result of one-offs and doesn’t look sustainable (yet), it shows that after the recent downgrading of growth forecasts for this year, the next revision is likely to be to the upside.”