German Q1 GDP – just a flash in the pan?

The German GDP increased by 0.2% in the first quarter compared to the fourth quarter, seasonally adjusted. This is in line with the consensus (0.2%). According to the Federal Statistical Office, the increase is attributed to both private consumption and investments. The office will publish figures on demand details on May 23.

It is important that the past GDP data were not revised which leaves the basis for our 2025 forecast unchanged. We continue to expect 0.0%.

Problems with seasonal adjustment

In interpreting the increase in the first quarter, it must be noted that there have been apparent problems with the seasonal adjustment of the German GDP in the past three years. In the years 2022 to 2024, real GDP always increased in the first and third quarters and always fell in the second and fourth quarters (Chart 1).

Otherwise, the leading indicators point to only a modest increase in Q2. Although the Ifo business climate has risen four times in a row, Trump's tariff shock hangs over this like a Sword of Damocles, even though the US President has reduced the additional tariffs (in the case of the EU, 20%) for 90 days (to 10%).

No long-term, strong recovery

All in all, the German economy is unlikely to be heading for a long-term, strong recovery. The Bundestag (lower house of parliament) has passed a fiscal program that, over the next twelve years, has an enormous volume of 3% of GDP. This is expected to provide more growth, especially in 2026 (forecast: 1.4%), even though a good part of the additional expenditures leads to higher prices resulting from the skilled labor shortage. However, the fiscal program is not likely to translate into permanently higher growth in the following years:

• Many companies in Germany miss a fresh start in economic policy after years with declining competitiveness. The crucial corporate tax reform, for example, will not be tackled until 2028, provided that financing is secured. Many companies also await clear signals regarding bureaucracy reduction and the limitation of sharply rising non wage labor costs.
• Even if Trump ultimately reduces import tariffs on goods from the EU to 15%, this would lower the German GDP by approximately 0.5% over two years according to our estimates. The export-oriented German economy would be significantly impacted, especially as there is the risk of retaliatory tariffs and protectionism spreading to countries other than the USA.

For full text see attached PDF-Version.