German economy grows stronger, but state deficit deepens

Germany's economy showed a sign of resilience, growing by 0.3 percent in the second quarter, a slightly stronger expansion than initially calculated. This marks the third consecutive quarter of growth for Europe's largest economy, indicating a slow but steady recovery amid ongoing crises. The increase was largely attributed to a robust export performance, with exports of goods and services rising by 2.0 percent compared to the first quarter.

Despite the positive export trend, domestic demand showed only modest gains. Both private and state consumption increased by a mere 0.1 percent, while investments in machinery and vehicles declined. The German Federal Statistical Office reported that the state's financial challenges remain substantial. In the first six months of the year, government spending exceeded revenue by 71.3 billion euros, a deficit that was 36.6 billion euros higher than in the same period last year.

The deficit relative to economic output stood at 3.1 percent in the first half of 2026, slightly exceeding the 3.0 percent limit set by European guidelines. This widening deficit, coupled with the impact of a dry summer, presents ongoing financial hurdles for the government and consumers. Economists, however, have noted a positive trend in business expectations, with some revising their growth forecasts upward for the year.

While government spending on infrastructure and defense provides some economic support, record low water levels on the Rhine River introduce a new risk. Disrupted water transport is dampening production in key industries like the chemical sector. Experts predict that the consequences of low water levels on vital waterways will temporarily slow the German economy's recovery in the third quarter.