Germany's economy expands by 0.2% in the first quarter, in line with expectations

Germany's economy expanded by 0.2% in the first quarter from the previous three-month period, preliminary data showed Wednesday, as U.S. tariff tensions threaten the country's growth outlook.

The figure, released by the German federal statistics office, is adjusted for price, calendar and seasonal variations.

The gross domestic product reading was in line with estimates from economists polled by Reuters. Germany's gross domestic had contracted by 0.2% in the fourth quarter.

The statistics office attributed the quarterly increase to the fact "that both household final consumption expenditure and capital formation were higher than in the previous quarter."

While acknowledging Wednesday's figures were positive, "the quarterly increase is still far too small to end the country's long-lasting stagnation," Carsten Brzeski, global head of macro at ING, said in a note.

Europe's largest economy has long been sluggish, with its GDP flip-flopping between growth and contraction in each quarter throughout 2023 and 2024. The country has so far avoided technical recession, which is defined by two consecutive quarters of contraction.

Key sectors of the economy, such as autos, have been suffering from stronger competition from China. Other industries including housebuilding and infrastructure have also been going through trying times that have been linked to higher costs, muted investment and bureaucratic hurdles.

Separately, U.S President Donald Trump's tariff policies have thrust uncertainty onto export reliant Germany which counts the U.S. as its most important trading partner.

As part of the European Union, Germany is facing 20% blanket tariffs on goods exported to the U.S., although these levies have been temporarily reduced to 10% to allow time for negotiations. U.S. duties on steel, aluminum and autos also affect the country.

The German government last week cut its economic outlook to predict stagnation in 2025, with outgoing economy minister Robert Habeck saying Trump's trade policies and their impact on the country were the main factor behind the revision.

One bright spot could emerge on the horizon. Germany earlier this year made changes to its long-standing debt brake fiscal rule, enabling higher defense spending, and creating a 500 billion euro ($570 billion) fund dedicated to infrastructure and climate investments.

This move has widely been regarded as a positive shift for the German economy, although much still depends on how the changes are implemented.

"Today's GDP report paints a picture of what could have happened if it hadn't been for US President Donald Trump's tariff blast – an economy that bottoms out and goes through a weak cyclical rebound, but could gain momentum with the announced fiscal stimulus," ING's Brzeski said.

While this recovery could still happen, the process now will likely take longer, the analyst said. He stressed that tariffs, uncertainty and other shifts in trade and geopolitics are weighing on the short-term economic outlook, while the planned fiscal measures can boost long-term growth.

While Germany's economy has been sluggish, the local inflation rate has been closing in on the European Central Bank's 2% target. The country's consumer price index, harmonized for comparability across the euro zone, came in at 2.3% in March on an annual basis, down from 2.6% in February.

Preliminary inflation figures for April are due out later on Wednesday, with economists polled by Reuters estimating a 2.1% reading.