Manufacturing performance far below expectations, Germany's Q2 GDP unexpectedly revised down

Germany's economic contraction exceeded expectations, breaking hopes for a recovery from a long-term recession, with particularly weak industrial performance being a major drag. The German statistical office released data on Friday showing that the final quarter-on-quarter GDP value for the second quarter was -0.3%, significantly larger than the preliminary estimate of 0.1%. The manufacturing sector performed far below expectations, with investment declining by 1.4%, while the supporting role of private consumption was also much lower than initially judged. This data shattered market expectations that Germany could quickly recover from the economic downturn following the Russia-Ukraine conflict. Analysts are concerned that multiple factors, such as the impact of U.S. tariffs and weak global demand, may continue to pressure the German economy in the coming quarters. Industrial production as the main drag, significant decline in investment The German statistical agency clearly stated in its announcement: "The performance of industrial production was particularly worse than initially estimated." This reflects that the deep-seated issues facing German manufacturing exceeded market expectations. The performance in terms of investment is equally concerning, with data showing a 1.4% decline in investment in the second quarter, becoming another major driver of economic contraction. Meanwhile, the supporting role of private consumption for GDP was far below the initial estimates from the statistical office, indicating insufficient domestic demand. Carsten Brzeski, head of global macroeconomics at ING, pointed out in a report to clients: "The German economy has experienced a reversal of the preemptive effect and is feeling the impact of U.S. tariffs for the first time comprehensively. The German economy has become too accustomed to stagnation, and a more substantial recovery may not begin until next year." The negative impact of tariff policies is reflected in the second-quarter data, putting the German export-oriented economic model under severe test. The German central bank warned in its monthly report released on Thursday that GDP may again fail to grow in the third quarter, with stagnation being the most likely outcome. Structural issues constrain economic recovery In addition to short-term factors, the German economy also faces a series of long-term structural challenges. Weak global growth, geopolitical uncertainties, and internal issues such as an aging workforce and overly complicated administrative procedures all constrain economic recovery. However, some positive signals have also emerged. Earlier this week, the S&P Global released the German Composite Purchasing Managers' Index, showing that private sector activity in Germany unexpectedly accelerated in August, with manufacturing nearing the end of a three-year decline. At the same time, the new German government's plan to significantly increase defense and infrastructure spending has also brought some optimism, with the effects of these measures likely to become apparent starting in 2026, providing new growth momentum for the economy