According to the Federal Statistical Office’s flash estimate, seasonally adjusted real gross domestic product (GDP) recorded a quarter-on-quarter decline of 0.1 % in the second quarter. It had still been rising distinctly in the previous two quarters. According to the Bundesbank’s Monthly Report, front-loading effects in anticipation of higher US tariffs also played a role at the beginning of the year. “After tariffs were raised at the beginning of April, however, industrial output and exports recorded rebound effects in the second quarter,” the economists write. 

Economic policy uncertainty, particularly owing to the trade dispute with the United States, continued to weigh on firms’ investment activities. Following a slight recovery in the previous quarter, construction output fell again, even reaching its lowest level in ten years despite a tendency for demand to rise. While private consumption benefited from a sharp rise in wages, the labour market remained too weak to generate stronger momentum. 

Significant revisions to GDP in recent years change the economic picture

In its flash estimate, the Federal Statistical Office published revisions with a significant impact on the GDP path between 2021 and 2024. According to these data, the recovery after the coronavirus pandemic in 2021 and 2022 was stronger. At the same time, the bout of weakness following the start of Russia’s war of aggression against Ukraine is now more pronounced. According to the Monthly Report, this means that the German economy was now clearly in recession in the years 2023 and 2024, in the sense of a significant, prolonged and broad-based decline in economic output with underutilisation of aggregate capacity. The downward movement faded out in mid-2024 and initially evolved into a slight recovery.

Labour market remains weak

“The level of employment has been virtually unchanged for two years now,” the Monthly Report states. Averaged over the second quarter, unemployment stood at 2.95 million persons, around 50,000 more than in the first quarter. The unemployment rate rose by 0.1 percentage point to 6.3 %. Over the past three years, it has become increasingly difficult for unemployed persons to move into employment. “The strong structural change makes it difficult for the unemployed to find a new job in their old profession and sector,” the experts write. Their search takes longer and more and more individuals have to reorient themselves regionally or professionally. Looking at various leading indicators, the Bundesbank expects a subdued outlook for the labour market over the coming months as well.

Inflation declined significantly in the second quarter

As measured by the HICP, consumer prices rose by a seasonally adjusted 0.4 % on the quarter in the second quarter of 2025, compared with 0.7 % in the first quarter. According to the economists, this was due, in particular, to falling energy prices. By contrast, the prices for services such as rents or motor vehicle insurance went up significantly again. Food prices also increased markedly. The annual inflation rate dropped steeply overall, from 2.6 % in the first quarter to 2.1 % in the second quarter. The economists expect a somewhat higher inflation rate for a time over the next few months, partly owing to base effects from energy. However, due to geopolitical factors the outlook remains highly uncertain, according to the Monthly Report.

The economy could languish in the third quarter

In the Bundesbank’s assessment, economic activity could more or less stagnate in the third quarter. “The basic agreement in the trade dispute between the United States and the EU has likely reduced uncertainty about future tariff levels. It remains high nonetheless given that questions remain unanswered and US economic policy is volatile,” the Bundesbank’s experts write. The negative impact of US tariffs is, however, being offset by demand from other economic areas that proved to be somewhat more robust than expected. 

The gloomy outlook for global trade, the still weak orders situation and low utilisation of existing capacity are expected to continue to weigh on business investment. Construction is unlikely to provide any strong stimuli yet and subdued labour market prospects and the weakening wage dynamics will probably hold back private consumption.