German economy shows tentative growth but remains fragile

The German economy is showing early signs of recovery, according to the latest DIW Economic Barometer, which rose for the third consecutive month in February, reaching 90.4 points, an increase of 2.7 points from January. Despite this upward trend, the index remains well below the 100-point threshold, which represents average economic growth.

“There is a good chance that Germany’s economic output will at least stabilize in the first quarter,” said Geraldine Dany-Knedlik, head of economic research at DIW Berlin. “Domestic demand is expected to provide some support, but foreign trade remains a concern, with German exports declining significantly in the winter months. Additionally, both domestic and international political uncertainties remain high.”

Political and Global Trade Challenges Weigh on Growth

The formation of a new German government following recent parliamentary elections remains uncertain, adding to economic unpredictability. Meanwhile, US President Donald Trump’s trade policies continue to create global instability. Recent tariff increases on steel and aluminum have raised concerns, with further levies on automobile imports and pharmaceuticals potentially affecting the German economy.

On a more positive note, interest rate cuts by the European Central Bank (ECB) and a slight economic upturn in the eurozone are expected to provide some momentum. However, German industry continues to face challenges, including higher production costs and increased global competition. Industrial output fell again in December, and companies remain cautious about their current business situation.

Industrial and Service Sectors Struggling to Gain Momentum

While business expectations have improved, as reflected in the ifo Business Climate Survey, there is no clear sign of a turnaround yet. “German companies remain hesitant,” said Laura Pagenhardt, an economic expert at DIW. “Uncertainty over domestic policies and trade conflicts is still dampening investment activity.”

The service sector is also under pressure, with the ifo Business Climate Index for this industry deteriorating slightly in February. The manufacturing sector’s weakness is beginning to impact business service providers, and job losses in manufacturing are also being felt. Nevertheless, overall unemployment remains low, despite the sluggish economy.

Cautious Optimism Amid Uncertain Outlook

Economic expert Guido Baldi described the recent DIW Economic Barometer trend as a “small ray of hope” but warned that Germany’s economic recovery remains fragile. “A prolonged government formation process or an escalation in US trade tariffs could quickly stifle this tentative recovery,” he cautioned.

As Germany navigates ongoing political and economic challenges, domestic policy stability and potential fiscal stimulus could play a key role in shaping the country’s economic trajectory in the coming months.

Source: DIW Economic Barometer Reports by DIW Berlin