Analysts noted that external shocks from U.S. tariffs and structural weaknesses in the domestic economy are weighing on recovery prospects.

BERLIN, Aug. 21 (Xinhua) -- Germany's economy, long hailed as the engine of Europe, is losing steam. Data released by the Federal Statistics Office (Destatis) shows its economy contracted by 0.1 percent in the second quarter of 2025, erasing modest gains earlier this year and falling short of forecasts.

After two years of contraction, the setback underscores how fragile Europe's largest economy has become. Analysts noted that external shocks from U.S. tariff and structural weaknesses in the domestic economy are weighing on recovery prospects.

JOB LOSS

The weak recovery is hitting workers and companies alike. Nearly 3 million people were unemployed in July, according to the Federal Labor Agency. Major employers are cutting staff: carmaker Audi plans to shed 7,500 jobs by 2029, logistics bellwether DHL 8,000 by year-end, tech giant Siemens more than 6,000 worldwide, Deutsche Bank 2,000 this year, and steelmaker Thyssenkrupp about 11,000 by 2030.

The pain is visible across industries from manufacturing, retail to catering, with 4,524 companies filing for insolvency in the second quarter, the highest since 2005, according to the Leibniz Institute for Economic Research. Carmakers including BMW, Mercedes-Benz and Volkswagen also reported sharp profit declines in the first half.

Industrial output fell in June to its lowest since May 2020, while exports to the United States dropped for the third consecutive month to the lowest since February 2022, Destatis said.

Weak demand is compounding the problem, with the Ifo Institute reporting more than a third of companies are short on orders, particularly in autos, machinery and electrical equipment.

Consumer confidence is equally depressed, with the market research agency GfK's consumer climate index sliding to minus 21.5 in August, worse than expectations as households cut spending and save more. GfK said most people are opting for frugality over consumption.

The central bank Deutsche Bundesbank expects gross domestic product to remain flat in 2025, suggesting that recovery is still out of reach.

TRADE PRESSURE

U.S. trade protectionism is holding back German growth, with export-oriented industries hit the hardest, Bundesbank chief Joachim Nagel said.

Hildegard Mueller, president of the German Association of the Automotive Industry, said that even after tariffs on EU cars were lowered to 15 percent, German firms still face billions of euros in extra costs annually. The industry's slow shift to electric vehicles continues to add pressure.

Domestically, long-standing structural issues are adding to the pressure. The German Economic Institute highlighted sluggish infrastructure investment and slow approval processes that are deterring investors. High energy costs, driven in part by the Russia-Ukraine conflicts, continued to squeeze manufacturers, pushing some firms abroad. Energy-intensive output remained well below pre-crisis levels.

Other challenges include weak digitalization, an aging workforce and rigid labor markets. Economists said these factors will continue to weigh on Germany's competitiveness unless reforms are implemented.

FISCAL PUSH

German Chancellor Friedrich Merz has unveiled stimulus plans focused on defense and public investment.

Some analysts said defense spending could deliver a short-term boost. Zheng Chunrong, director of the German Research Center at Tongji University in China, said such investment has a direct pull effect given weak demand but cautioned on its inability to sustain long-term growth.

The government has also approved record public investment for 2026 and launched a "Made for Germany" initiative with 61 firms, including Siemens and Deutsche Bank, pledging 631 billion euros (731.86 billion U.S. dollars) in projects by 2028. Merz described it as one of the largest investment plans in decades.

Despite the stimulus, skepticism runs deep. Nearly half of economists polled by the Ifo Institute remain unconvinced, citing a lack of structural reform. The economists said reforms are the only way to restore competitiveness.