German economy has gained sufficient momentum to escape stagnation this year: DB

Deutsche Bank Research indicates Germany's economy is gaining momentum, avoiding stagnation with a 0.4% GDP growth in Q1 driven by exports, private consumption (+0.5%), and investment (+0.9%). While a tariff-related export boost may fade, domestic demand is expected to continue into Q2, with analysts projecting 0.1%-0.2% growth; however, trade-related uncertainty and potential U.S. tariffs pose risks in Q3 before a more stable Q4 driven by government spending and normalized savings rates, supporting Deutsche Bank's full-year growth forecast of 0.3%.

Analysis

Deutsche Bank Research posits that the German economy is demonstrating sufficient momentum to circumvent stagnation this year, evidenced by a 0.4% GDP expansion in the first quarter. This growth was notably supported by a surge in March exports, particularly in pharmaceuticals and automobiles, which analysts suggest may reflect pre-emptive shipments ahead of anticipated tariffs. Crucially, domestic demand showed underlying resilience, with private consumption increasing by 0.5% and investment climbing 0.9%. The construction sector also contributed positively, expanding for a second consecutive quarter. Conversely, public consumption detracted from domestic demand with a 0.3% fall, attributed to the federal government's provisional budget, a situation expected to normalize with formal budget approval. Deutsche Bank anticipates this domestic strength to persist into the second quarter, forecasting growth between 0.1% and 0.2%, despite a potential fading of the export boost. Supporting this view, business surveys show limited deterioration, the Ifo Business Climate Index has been trending upwards, and manufacturing indicators point to a rebound, alongside improving GfK consumer confidence. However, the recovery is projected to remain fragile in the third quarter due to persistent trade uncertainties, with potential U.S. tariffs in July identified as a key risk. A more stable environment is foreseen for the fourth quarter, bolstered by the government likely exiting provisional budgeting and introducing an expansionary fiscal plan for 2026, which is expected to significantly lift aggregate investment and be complemented by normalizing household savings rates strengthening consumption. These factors underpin Deutsche Bank's confidence in their 0.3% full-year growth forecast, which stands in contrast to consensus views predicting continued stagnation.

Key Decisions for Investors

• Investors should assess the implications of Deutsche Bank's 0.3% full-year growth forecast for Germany, which is notably more optimistic than prevailing consensus expectations of stagnation, potentially signaling undervaluation in certain German assets.
• Closely monitor German export-oriented sectors, particularly automobiles and pharmaceuticals, recognizing that the Q1 export strength may have been influenced by tariff front-loading and that significant trade-related uncertainties, including potential U.S. tariffs, pose a key risk for the third quarter.
• Consider opportunities in sectors sensitive to domestic demand, such as construction and consumer-facing industries, given the reported 0.5% rise in private consumption and 0.9% increase in investment, and watch for impacts from the anticipated shift away from provisional budgeting and potential expansionary fiscal policy later in the year and into 2026.