• German economy proving to be more resilient than expected, say KfW economists
• KfW Research now expects 1.1 per cent growth for 2026 and 1.5 per cent for 2027
• Industrial orders are on the rise

The German economy has shown itself to be significantly more resilient this year than generally assumed. In the second quarter, gross domestic product (GDP) grew by 0.3 per cent on the previous quarter, after even expanding by 0.4 per cent in the first quarter. KfW Research had initially expected a GDP contraction in the second quarter due to the impact of the Iran war.

Acting as another dampener on the economy, low river water levels are now severely disrupting shipping, especially on the Rhine. Growth is therefore likely to merely stagnate in the third quarter. Nonetheless, the economists at KfW Research have slightly lifted their growth forecast for this year by 0.4 percentage points to 1.1 per cent. For 2027 they expect GDP growth of 1.5 per cent, a 0.2 percentage point increase on the May forecast.

The forecast is essentially based on the expected sharp growth in manufacturing output that should result from the increasing volume of incoming orders. In the second quarter, these increased by 1.4 per cent on the previous quarter and by 4.5 per cent on the same quarter of the previous year. Thus, the stock of orders was 9.3 per cent higher in June than in the previous year.

The unclear situation in the Straight of Hormus, the tariff conflicts with the US and low river levels in Germany are all factors that continue to weigh on the German economy. But we still see a ray of light,”

said Dr Dirk Schumacher, Chief Economist of KfW.

There is good reason to hope that industrial production will pick up substantially going forward. This is partly due to the impetus from the Special Fund of the Federal Government. We expect positive and even strong growth rates from the final quarter of this year.

The strongest increase in orders received in the second quarter compared with the previous year was 21 per cent in the segment “data processing equipment, electronic and optical goods.” This includes products that benefit from the current global AI boom, such as special lasers and other products of the digitalisation industry. The high demand associated with the expansion of AI capacities also appears to be helping the mechanical engineering segment, which is so important for Germany. New orders there increased by ten per cent in the second quarter. There was also a clear upward trend in “other automotive construction”, which includes military vehicles.

The economy developed more strongly than expected not just in Germany but in the euro area as a whole. Unlike with the energy price shock of 2022, energy-intensive industries did not experience any sharp downturn as a result of the conflict in the Middle East. Overall, the manufacturing sector in the euro area developed moderately positive in the second quarter on the previous quarter, most likely on the back of defence-related sectors and the high-technology sector. KfW Research has upgraded its growth forecast for the euro area by 0.2 percentage points to 0.8 per cent for this year and likewise by 0.2 percentage points to 1.2 per cent for 2027.

The inflation forecasts were adjusted only marginally. KfW Research expects consumer prices to increase by 2.9 per cent in Germany and the euro area this year (May forecast: 3.1 per cent). Inflation is likely to turn out lower in both regions in 2027 but remain slightly above the ECB’s two-per cent target. KfW Research still predicts that after raising interest rates one last time in September, the ECB will refrain from further monetary tightening for the time being.

The current KfW Business Cycle Compass is available at: KfW Business Cycle Compass | KfW