Is Germany's economic slump finally over?

Germany's economy appears to be showing signs of recovery after a prolonged slump, according to recent data. The country's GDP growth is projected to be its strongest since 2022, and business sentiment has started to improve. The official statistics office reported that the economy grew by 0.3% in the second quarter of 2026, surpassing expectations.

Several leading economic institutions, including the Ifo Institute and the Kiel Institute, now forecast growth of 1.3% or more for 2026. The Ifo business climate index, a key indicator of corporate mood, reached its highest level in a year in August. While the momentum is positive and the economy has shown resilience, some fundamental challenges still need to be addressed.

Volkswagen is undergoing a significant downsizing, reflecting broader restructuring efforts across the country due to competition from China and other global headwinds. The closure of the Strait of Hormuz as a result of the Iran war has benefited Germany's exports and industrial base, leading to strong production growth. Chancellor Friedrich Merz's government has introduced various measures, including a €500 billion infrastructure investment drive and a €10 billion tax relief plan for lower-income households, which may have contributed to the turnaround.

Despite the positive outlook, domestic demand remains stagnant, and structural challenges such as Chinese competition and a lack of innovation and digitalization still persist. Nevertheless, the recent data suggests that Germany's economy is bouncing back from its prolonged slump and is now on track for growth, albeit not a "wirtschaftswunder" recovery.