Upbeat development reportedly gets criticism from International Monetary Fund chief due to lack of visible progress or changes.
In a cautious optimistic outlook, economists view the recovery of Germany's economy with a sense of fragility and unevenness. The latest IFO Business Climate Index, released on Wednesday, rose to 88.6 in July 2025 - the highest since May 2024 - signalling improved corporate sentiment, particularly in manufacturing where capacity utilization slightly increased.
However, demand softness persists, and the service sector faces challenges. Deteriorating conditions in IT services and ongoing underinvestment in construction are areas of concern.
The Conference Board projects a mild German GDP growth of 0.5% for 2025, following two years of contraction. Their Leading Economic Index (LEI) showed the strongest monthly increase in five years in May 2025, driven by rebounding stock prices, consumer confidence, and new investment orders bolstered by fiscal stimulus.
Additional signals from sentiment indicators like the ZEW Index also point to continued recovery optimism, with its July 2025 reading improving noticeably.
Despite these positive signs, economists warn that the recovery is heavily dependent on sustained fiscal stimulus, remains vulnerable to external risks including US trade tensions and a stronger euro, and lacks signs of a fundamental economic model overhaul in Germany.
construction in Germany is expected to become even more expensive, with the potential burdens from US trade policy being a concern. The order situation in industry still lacks momentum, according to Ifo President Fuest.
The Federal Statistical Office will publish a preliminary estimate of Europe's largest economy's performance in the spring on the following Wednesday. The federal government is shifting a large amount of core budget expenditure into the special fund and quickly spending the released funds, according to Jörg Krämer.
Jörg Krämer, Commerzbank chief economist, sees the renewed Ifo increase as a positive signal but expects only a relatively strong growth of 1.4% for the coming year. Economists polled by Reuters expected a stronger increase to 89.0 points in July.
In summary, while German economic indicators show that the recovery is underway and investor confidence is rising, economists stress that this rebound is fragile, uneven across sectors, and not yet assured to be sustained without further structural reforms and favorable global conditions.
The federal government is considering investing in vocational training programs to bolster the service sector, in light of ongoing underinvestment and deteriorating conditions in IT services. To finance these efforts, a portion of the core budget expenditure is being transferred into a special fund, speeding up its spending rate, as suggested by Jörg Krämer, Commerzbank's chief economist.
In an effort to contribute to long-term economic stability and growth, the community is advocating for policy reforms that focus on fostering affordable construction and reducing potential trade tensions with the US, which could further increase construction costs in Germany.
