Germany’s Elusive Economic Revival Is Within Touching Distance

An industrial chemical park in Leuna, Germany. Photographer: Sean Gallup/Getty Images Photo by Sean Gallup /Photographer: Sean Gallup/Getty

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(Bloomberg) — The long-awaited recovery of Europe’s largest economy is finally coming into view.

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Data this week revealed German output didn’t just expand more than anticipated in the second quarter, but was stronger than initially thought in the first as well. Alongside upbeat indicators of business activity and confidence, the upshot is the most upbeat outlook in some time.

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A meaningful revival, which has proved elusive for years, isn’t guaranteed. Disruption from Iran war inflation means 2026 won’t quite be the “year of growth” that Chancellor Friedrich Merz had promised. That conflict is also still simmering. 

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But with massive infrastructure and defense spending and a delayed bout of reforms providing much needed zip, Germany may at last be on the cusp of overcoming the lethargy that’s seen it weigh down the wider euro area rather than help the bloc catch a more dynamic US.

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“I’m optimistic because the reforms have really surprised me,” said Karsten Junius, chief economist at Bank J Safra Sarasin. “Spending on infrastructure and defense should have a significant impact on the German economy, which is proving to be very resilient despite the war in Iran. In my opinion, a cyclical upswing over the next two years is virtually inevitable give in the reforms and all that money.”

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Merz’s plans, designed to perk up growth, are garnering praise from companies. Recent moves address taxes, pensions, the labor market and bureaucracy with the aim of easing life for businesses. 

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Before the GDP surprise, Germany’s government forecast growth of just 0.5% this year. That such an outcome would mark the country’s fastest annual expansion since 2022 illustrates how deep the country’s economic problems have become after once mighty carmakers lost their way, high energy prices hollowed out parts of the chemicals industry and Chinese machine-builders became formidable rivals.

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Indeed, key sectors continue to struggle. Despite a good start to 2026 by mechanical-engineering firms, production was slipping by mid-year, according to Johannes Gernandt, chief economist at VDMA, a lobby organization for the industry who cites structural problems on top of geopolitical volatility in explaining the downturn.

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“Germany is losing its competitive edge,” he said. “In many areas, we’re no longer that much better than we are more expensive.”

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Auto producers, meanwhile, are retrenching. Volkswagen AG announced plans to eliminate 50,000 more jobs in July, and BMW AG offered voluntary severance packages to thousands of its workers in Germany in an effort to become leaner. Slumping sales in China have hit car companies hard, at a time when they were already grappling with US tariffs and high costs domestically.