German economy defies Middle East war by growing in the second quarter
Germany's Q2 GDP grew 0.2% QoQ, defying Middle East war fears and soaring energy prices, driven by exports. ING notes this is the first time since pandemic lockdowns that the economy has avoided shrinking for four consecutive quarters, though the economy remains smaller than in late 2022. The outlook hinges on energy prices and conflict expansion, with low water levels adding supply-chain risk.
What the desk is arguing
The German economy grew 0.2% QoQ in Q2, defying fears related to the Middle East war and soaring energy prices, per the full note [ing-think]. This follows an upwardly revised 0.4% in Q1, marking the first time since pandemic lockdowns that the economy has avoided shrinking for four consecutive quarters.
ING highlights that average quarterly growth over this period is just 0.1%, and the economy's size remains smaller than in late 2022. Growth was mainly export-driven, while investments dropped. The desk implicitly rejects the narrative that the German economy is in a deep slump, emphasizing resilience despite the depressed mood.
How firms align with this view
Key takeaways
- 01German Q2 GDP grew 0.2% QoQ, beating expectations despite Middle East war and energy shocks.
- 02Export strength drove growth while investment contracted.
- 03The economy is still smaller than in late 2022, with average quarterly growth of just 0.1%.
- 04Near-term outlook depends on energy prices, conflict expansion, and low water levels impacting supply chains.
Market implications
The resilience in German GDP may support EUR/USD in the near term, but the fragile outlook caps upside. Watch for further data on industrial production and export orders for confirmation.
Risks to this view
An escalation of the Middle East conflict disrupting trade routes or a spike in energy prices would reverse the rebound. Additionally, record-low water levels in key waterways threaten supply chains and industrial activity, posing a downside risk to Q3 growth.
Newer quick take Older quick take Quick take Published 09:10 Germany German economy defies Middle East war by growing in the second quarter It's almost too good to be true: the German economy defied the fallout from the war in the Middle East and grew by 0.2% quarter-on-quarter in the second quarter of the year, as some industrial sectors benefited from the fact that Asian competitors were hit harder by the closure of the Strait of Hormuz This GDP reading illustrates that the German economy is doing better than its reputation suggests Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Carsten Brzeski Global Head of Macro The just-released first estimate of GDP growth in the second quarter of the year suggests that the German economy defied a rather depressed mood and fears related to the war in the Middle East and soaring energy prices, growing by 0.2% quarter-on-quarter. That followed an upwardly revised 0.4% QoQ increase in the first quarter. This is the first time since the end of the pandemic lockdowns that the German economy managed not to shrink for four consecutive quarters.
Still, we must put this into perspective: average quarterly growth over this period has been just 0.1%, and the size of the German economy is still smaller than in late 2022. According to the statistical office, growth in the second quarter was mainly driven by exports, while investments dropped. Looking ahead, it is obvious that the short-term outlook for the German economy is highly dependent on energy prices and the war in the Middle East, as it affects both industry and households.
Even if the German economy has proven to be more resilient than some had feared, an expansion of the conflict to other trading routes would obviously pose a new risk to the economic rebound. Also, the warm and dry summer weather has brought water levels in main transportation waterways to record low levels, potentially affecting industrial supply chains and activity in the construction sector. As concerning as the latest developments are for the short-term outlook, the longer-term outlook for the German economy will still be driven by fiscal stimulus and investments in defence and infrastructure, as well as the ability to translate recent reform plans into real and tangible action.
In this delicate mix of short-term downside risks and longer-term optimism, let’s not forget that to fundamentally bring the German economy back on a sustainable growth path, the economy still needs more reforms that improve international competitiveness, a clear plan for affordable energy and more direct incentives, e.g. tax cuts, to boost domestic demand, ie both corporate investments and private consumption. Elements that are currently still missing in the recently announced reform package. In this regard, a lot will depend on whether the latest political turbulence in Berlin will ease over the summer and also give a political reset.
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