German economy grows 0.3% in second quarter, beating estimate

The German economy grew 0.3% in the second quarter from the previous three months, slightly more than the initially estimated 0.2%, the Federal Statistical Office said.

Europe's largest economy has now expanded for three consecutive quarters.

"As in the first quarter, the increase was mainly driven by strong export growth," said Ruth Brand, president of the Federal Statistical Office.

Exports of goods and services rose by 2% compared with the first quarter of 2026. By contrast, both private and government consumption increased by just 0.1%, while investment in areas such as machinery and vehicles declined.

"Given the economic outlook, which is gloomy in some respects due to the war in Iran, German growth is surprisingly robust," said Thomas Gitzel, chief economist at Liechtenstein's VP Bank. "The good news is set to continue: Order books in the manufacturing sector are well-filled."

Deficit soars

Despite signs of recovery, Germany's public finances remain under heavy pressure. 

Overall, the government, state governments, local authorities and social security funds ran a deficit of €71.3 billion ($83 billion) in the first six months of the year, €36.6 billion more than in the same period last year.

The deficit stood at 3.1% of economic output in the first half of 2026, the Federal Statistical Office reported on the basis of provisional data. This is slightly higher than the 3% permitted under EU budget deficit guidelines.

The bulk of the deficit is attributable to the federal government, where the shortfall widened by €29 billion to just over €48 billion. The deficit also rose at the state government level, while local authorities managed to reduce their deficit compared with the same period last year. 

Social security recorded a deficit of €1.8 billion, having posted a surplus of €3.8 billion in the first half of 2025. This was primarily due to higher expenditure on statutory health and long-term care insurance.

As the government channels billions of euros into infrastructure and defence, financed in part by new debt, economists expect the deficit ratio to rise from 2.7% in 2025 to more than 4% in 2027.

Some economists have warned that Germany's growing debt increases the risk that the country's AAA credit rating will be downgraded, making government borrowing more costly.

Promising signs

There are nevertheless growing signs that the German economy is gradually gaining momentum, supported by strong exports, high corporate profits and a revival in the construction sector.

The economy grew 0.4% in the first quarter, prompting some economists to raise their forecasts to around 1% growth for the full year. That would mark a small upturn after 0.2% growth in 2025 following two years of contracting economic output.

Low water levels slow recovery

While the government's multibillion-euro spending on infrastructure and defence is propping up the economy, record-low water levels in parts of the country are holding back production in key sectors, threatening to slow the economic recovery.

"In the third quarter, the consequences of low water levels on key waterways are likely to temporarily slow down the recovery of the German economy," the central Bundesbank said recently. It forecast that the economy is likely to "grow only slightly, if at all" between July and September.

High energy prices also remain a burden for businesses and households. After a fuel subsidy introduced to cushion the impact of price spikes linked to the Iran war expired, Germany's inflation rate rose by 0.5 percentage points to 2.8% in July. 

With the conflict between the United States and Iran unresolved and the Strait of Hormuz - a critical route for global oil and gas trade - still blocked, inflation could rise further in the coming months.