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Investing.com - Recent upbeat economic data and a relatively benign inflationary backdrop point to positive signals for the German economy despite looming tariff-driven headwinds, according to analysts at Barclays (LON:BARC).
Earlier this week, figures showed that business activity in Germany -- Europe’s largest economy and traditional powerhouse -- rebounded back into growth in June thanks in large part to the strongest jump in new orders in more than three years.
The numbers came after surveys also found that German investor sentiment improved by more than anticipated this month, as traders eyed predictions that the economy would soon return to growth following two years of contraction.
Writing in a note to clients on Friday, the Barclays strategists said that "multi-year fiscal expansion" in Germany "remains a key driver of our bull case" on the country, even as concerns swirl around the upcoming expiration of a delay to punishing U.S. tariffs early next month.
Underpinning the rosier outlook has partially been a decision by lawmakers in Berlin earlier this year to pursue a sweeping, 500 billion euro defense and infrastructure spending plan. The move, which saw legislators ease what had been longstanding borrowing limits to help fund the expenditures, comes as Germany eyes heightened security concerns around Russia.
Meanwhile, the German cabinet has also approved a 2025 draft budget, as well as framework for 2026, that included record levels of public investment.
The Barclays strategists noted that the scope of announced spending exceeded their economists’ expectations, with roughly 270 billion euros of a planned 400 billion euro special investment fund now projected to be deployed by 2029.
"This front-loading is welcome news, especially given that execution risk is a key concern amongst investors," the analysts said, adding that, while a possible uptick in debt issuance is feared to put upward pressure on German government bond yields, "they have remained pretty much range bound" since Germany’s parliamentary election in February.
They argued Germany’s improving economic outlook compared to the wider eurozone also supports the case for continued outperformance in the nation’s DAX index, which has recently rallied.
However, stronger domestic demand in Germany could lead to more firming of the euro against a struggling U.S. dollar, potentially denting European earnings and weighing on regional exporters in the near term, the analysts predicted.
"Medium term though, it may help bring more foreign money back into Europe, if of course growth sustainably improves," they said.