Germany’s Economic Struggles

By Maria Martinez

BERLIN (Reuters) – The German economy unexpectedly contracted in the second quarter, continuing to face challenges after nearly avoiding a recession earlier this year. In July, inflation rose, highlighting the ongoing struggles of the euro zone’s largest economy.

Germany’s gross domestic product (GDP) shrank by 0.1% in Q2 compared to the previous three-month period, according to preliminary data from the statistics office released on Tuesday. This was contrary to analysts’ predictions of a 0.1% growth, following 0.2% growth in Q1.

Last year, Germany was the poorest performing major economy, with a GDP contraction of 0.3%. It approached recession at the start of 2024, affected by both cyclical and structural challenges.

In Q2, Germany lagged behind its peers, as France and Spain performed better than expected, while Italy remained stable. In contrast, the euro zone’s economy grew by 0.3% in the three months leading to June.

“While German data indicates stagflation, the eurozone shows a relatively solid but potentially waning recovery with persistent inflation,” stated Carsten Brzeski, global head of macro at ING.

Counter to expectations, inflation in Germany rose to 2.6% in July, according to preliminary data, despite analysts’ forecasts anticipating no change. This increase follows a 2.5% rise in consumer prices in June, using harmonized data for comparison across EU countries.

Euro zone inflation figures, set for release on Wednesday, will clarify the prospects for a rate cut by the European Central Bank (ECB) in September, with market predictions suggesting another cut before year-end.

Inflation in Germany appears to remain above 2%, analysts indicate.

“This persistently high inflation raises doubts about another rate cut in September,” Brzeski remarked. Core inflation, excluding volatile food and energy prices, remained at 2.9% in July, unchanged from the previous month. This stability is largely due to persistent inflation in services, which stays at 3.9% in July, fueled by high wage increases.

This trend is unlikely to change soon, suggesting core inflation will stay well above the ECB’s target of 2% in the upcoming months, according to Ralph Solveen, senior economist at Commerzbank.

Capital Economics anticipates another rate cut in the September meeting but acknowledges that the decision will depend on August’s inflation data, as noted by chief European economist Andrew Kenningham.