Germany’s second chance for growth rebound starts now

German data in the coming week showing the cumulative impact of the Iran war will set the stage for the government’s latest bid to awaken animal spirits in Europe’s biggest economy.

Factory orders, industrial production and export numbers will showcase how manufacturing in a country that was formerly the engine of the region’s expansion fared during May, the third and final full month of the conflict.

Those reports coincide with a push by Chancellor Friedrich Merz for pro-growth reforms that will be presented to the cabinet on Monday to “break out of this slump in our economy,” as he put it on Thursday.

The package aims to provide momentum for businesses by pushing labour-market flexibility through looser fixed-term contract rules and tax-favoured severance payments. Further efforts to cut red tape and accelerate planning and permitting are also designed to boost expansion.

Against that backdrop, the sustained Middle East ceasefire and a drop in oil prices offers another chance to catch the tailwind of its massive fiscal stimulus and recover lost ground in what Merz had previously dubbed Germany’s “year of growth.”

The Bundesbank’s forecast of 0.5% expansion for 2026 would amount to Germany’s best performance since the pandemic, with “considerable steam” seen gathering thereafter. Even so, President Joachim Nagel insists the country can do much better. 

“These are OK numbers, but there is more that we can do to really boost economic growth,” Nagel told Francine Lacqua on Bloomberg Television on Wednesday. 

The week’s German data may offer a mixed picture. Economists predict a rebound in factory orders on Monday, followed by unchanged industrial production on Tuesday. Export numbers on Thursday are forecast to show the first decline since January.

Inflation data on Friday, meanwhile, will confirm whether the initial estimate of 2.4% for June, which was lower than expected, did indeed transpire. 

“Overall, German industrial activity should expand modestly over the remainder of the year, supported by higher public spending on defence and infrastructure. Higher energy prices and structural challenges are likely to keep a stronger rebound out of reach,” Bloomberg Economics analysts wrote.

Elsewhere, eurozone policymakers will be out in force at a conference in Rome at the start of the week, The ECB account of its June meeting, when the Bank raised rates, arrives on Thursday. 

Aside from the German factory numbers, other eurozone highlights include Italian industrial production to come on Friday.