The German economy is finally showing clear signs of recovery after a prolonged period of uncertainty. Europe’s largest economy now projects its strongest GDP growth since 2022. Business sentiment is also trending upwards once again.
Official statistics released last week confirmed the economy grew by 0.3% in the second quarter of 2026. This figure surpassed estimates. It builds on robust performances from the two preceding quarters.
Several leading economic institutes have since revised their forecasts upwards for the year. The Ifo Institute, Kiel Institute for the World Economy, and Leibniz Institute for Economic Research all now predict growth of 1.3% or more for 2026. Meanwhile, the Ifo business climate index, a crucial measure of corporate confidence, reached its highest level in a year for August.
Clemens Fuest, president of the Ifo Institute, commented on the data. He suggested it was “more than a flash in the pan,” adding that “it could be a recovery.” Carsten Brzeski, ING’s global head of macro research, agreed. He noted that the “momentum is positive and the economy has shown a better-than-feared level of resilience.”
However, Brzeski cautioned against excessive optimism. He explained that some of the economy’s fundamental problems persist. “In order to really transform this into a longer-term recovery story, we still need more,” he stated.
These positive figures emerge despite a backdrop of negative headlines. Volkswagen, a major German company, is undergoing significant downsizing. This reflects wider industrial restructuring amidst global competition, particularly from China.
Additionally, record low water levels on key waterways like the Rhine and Danube disrupted trade this summer. The ongoing war in Iran continues to push energy prices higher. Yet, the German economy has navigated some of these challenges effectively.
Exports and a strong industrial base have primarily powered GDP growth. New orders have increased for the third consecutive month. This has led to the strongest production growth since early 2022. The VDMA, representing mechanical and plant engineering, reported a 2% rise in foreign orders for July year-on-year.
Brzeski highlighted how the closure of the Strait of Hormuz, resulting from the Iran war, benefited many German manufacturing firms. Energy-intensive sectors, such as chemicals, particularly profited. They saw increased orders and gained market share from Asian suppliers, who were more reliant on Middle Eastern oil. This led to a “rechanneling of industrial orders away from Asia to Europe and Germany.”
The German Federal Ministry for Economic Affairs and Climate Action also identified this factor. Its August statement noted that Asian rivals “were more affected by price increases and supply bottlenecks.” The Ministry added that recent shocks have prompted German companies to diversify supply chains. Businesses are now maintaining larger stocks and using varied transport routes to build resilience.
Chancellor Friedrich Merz’s government also merits some credit for the turnaround. This is despite its historic unpopularity in 2026. “It’s driven by government demand and debt-financed spending, particularly in defense,” Fuest observed. The government’s economic strategy includes a €500 billion infrastructure investment drive. It also features a substantial increase in defense spending and competitiveness reforms. Furthermore, energy price relief measures and a €10 billion tax relief plan for lower-income households are in effect. Brzeski suggested stimulus packages are “gradually reaching the economy.”
Despite the positive data, many long-standing structural problems for the German economy persist. The recent uptick relies heavily on export demand. Domestic demand, however, shows almost no increase. Public and private consumption spending remained flat, while investment declined. Brzeski warned against assuming “everything is fine,” citing persistent factors undermining German competitiveness.
Chinese competition remains a significant challenge. The long-term loss in international competitiveness within the automotive and other key industries also endures. These structural hurdles will be difficult to overcome. However, the positive sentiment among businesses continues.
Indicators for the third quarter of 2026 reveal considerable optimism among business leaders. Overall German growth is now tracking for a 1.2% increase for 2026. This places Germany ahead of other European nations like France, the UK, and the Netherlands. The economy had faced a prolonged slump since 2022 following the war in Ukraine.
Some analysts believe the recent data indicates a natural “bottoming out.” Growth was therefore inevitable. “It could hardly have gotten much worse,” Brzeski stated. He added, “We’re bouncing back from low levels. This is not wirtschaftswunder [‘economic miracle’] 3.0, we have to keep that in mind.”
Part of the optimism also stems from corporate Germany’s acceptance of harsh realities. Businesses are belatedly striving to improve in areas like innovation and digitalization. “They realize they simply have to embrace technological change, AI and so on, and have to start investing,” Brzeski explained. He noted they are acting out of “a question of survival.” Fuest asserted that Germany’s “industrial core” remains intact, with three-quarters of manufacturing companies still expanding. Yet, he warned the recovery would be fleeting without more substantial structural change. He urged the country to “allow for structural change and to find new areas where German companies have competitive advantages.”
