Germany’s Elusive Economic Revival Is Within Touching Distance

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Or sign-in if you have an account.An industrial chemical park in Leuna, Germany. Photographer: Sean Gallup/Getty Images Photo by Sean Gallup /Photographer: Sean Gallup/Getty(Bloomberg) — The long-awaited recovery of Europe’s largest economy is finally coming into view.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountData this week revealed German output didn’t just expand more than anticipated in the second quarter, but was stronger than initially thought in the first as well. Alongside upbeat indicators of business activity and confidence, the upshot is the most upbeat outlook in some time.A meaningful revival, which has proved elusive for years, isn’t guaranteed. Disruption from Iran war inflation means 2026 won’t quite be the “year of growth” that Chancellor Friedrich Merz had promised. That conflict is also still simmering. Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againBut with massive infrastructure and defense spending and a delayed bout of reforms providing much needed zip, Germany may at last be on the cusp of overcoming the lethargy that’s seen it weigh down the wider euro area rather than help the bloc catch a more dynamic US.“I’m optimistic because the reforms have really surprised me,” said Karsten Junius, chief economist at Bank J Safra Sarasin. “Spending on infrastructure and defense should have a significant impact on the German economy, which is proving to be very resilient despite the war in Iran. In my opinion, a cyclical upswing over the next two years is virtually inevitable give in the reforms and all that money.”Merz’s plans, designed to perk up growth, are garnering praise from companies. Recent moves address taxes, pensions, the labor market and bureaucracy with the aim of easing life for businesses. Before the GDP surprise, Germany’s government forecast growth of just 0.5% this year. That such an outcome would mark the country’s fastest annual expansion since 2022 illustrates how deep the country’s economic problems have become after once mighty carmakers lost their way, high energy prices hollowed out parts of the chemicals industry and Chinese machine-builders became formidable rivals.Indeed, key sectors continue to struggle. Despite a good start to 2026 by mechanical-engineering firms, production was slipping by mid-year, according to Johannes Gernandt, chief economist at VDMA, a lobby organization for the industry who cites structural problems on top of geopolitical volatility in explaining the downturn.“Germany is losing its competitive edge,” he said. “In many areas, we’re no longer that much better than we are more expensive.”Auto producers, meanwhile, are retrenching. Volkswagen AG announced plans to eliminate 50,000 more jobs in July, and BMW AG offered voluntary severance packages to thousands of its workers in Germany in an effort to become leaner. Slumping sales in China have hit car companies hard, at a time when they were already grappling with US tariffs and high costs domestically.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.Other success stories are emerging, however, including defense, under a Europe-wide retooling of military capabilities to counter Russian aggression and make up for dwindling support from US President Donald Trump.“Defense is the one sector where we do have a booming economy,” said Clemens Fuest, president of the Ifo research institute, while cautioning that it remains small and will take time to have a major influence on output overall. “We have successful startups but also the established defense companies are expanding.”The army revamp is part of a military budget that exceeds €100 billion ($115 billion) in 2026, with infrastructure outlays adding more than €50 billion a year. The programs have helped cushion the consequences of the fighting in the Middle East but their effect will be starker once hostilities die down.Analysts surveyed by Bloomberg see gross domestic product jumping 1.1% next year and 1.2% in the following one. For 2026, Bloomberg Economics now sees an advance of 0.9% in GDP.What Bloomberg Economics Says…“Germany’s economy proved more robust than expected in the second quarter despite energy price headwinds, supported by another increase in exports. As fiscal stimulus gathers pace, growth could gain further modest momentum toward the end of the year. Investment remains depressed, however, and a fresh escalation of the US-Iran conflict that triggers a prolonged surge in oil and gas prices remains a key downside risk to our baseline forecast.”—Martin Ademmer. Click here for full REACTThe government’s reform efforts also include introducing looser fixed-term contracts, cutting red tape and speeding through planning and permits. Plans for €10 billion in annual income tax relief for low- and middle-income earners are also in the works.Still, a strong pickup remains unlikely. “I expect only a moderate recovery once the Middle East war is settled,” said Joerg Kraemer, chief economist at Commerzbank. “The main reason is that the German government’s recent decision did not markedly improve competitiveness which has been eroding since the Merkel years.”Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.